How Investment Banks Get Paid

Investment banks are paid mainly through underwriting spreads on offerings and through retainers plus success fees on advisory work, with expenses reimbursed on top. Published data show IPO gross spreads cluster at exactly 7% for moderate-size deals and fall for very large ones. FINRA Rule 5110 polices underwriting compensation in public offerings, while success fees are a hallmark of activity that requires broker-dealer registration.

Three ways to get paid

Most investment banking compensation comes in three forms. In an underwritten offering, the bank earns a spread: it effectively buys or sells the securities at a discount to the price investors pay. In advisory work, the bank typically earns a retainer (a fixed fee paid regardless of outcome) and a success fee (paid only if a transaction closes, usually tied to its size). On top of either, the client often reimburses the bank's out-of-pocket expenses such as legal and travel costs.

Underwriting spreads

The SEC notes that underwriters' compensation is typically a percentage of the offering price, which gives them an interest in a higher price; at the same time, they are responsible for selling the deal and want a price attractive to their investor clients ^[2]. That tension is one reason the SEC describes the IPO price as a negotiated estimate of value ^[2].

Published data show striking uniformity. Of US operating-company IPOs from 2001 to 2025 raising $30 million to $160 million (in 2025 dollars), 93.3% paid a gross spread of exactly 7%, according to University of Florida professor Jay Ritter ^[1]. Bigger deals pay less: among IPOs raising more than $160 million, 54.4% paid less than 7% ^[1], and the mean spread for IPOs of $1 billion or more was 4.44% ^[1]. Ritter notes that for the smallest deals it is not uncommon for a non-accountable expense allowance of up to 3% of proceeds to be paid on top of the spread, so total underwriter compensation is higher than the spread alone ^[1]. He points readers to Hsuan-Chi Chen and Jay Ritter's June 2000 Journal of Finance article, "The Seven Percent Solution," for evidence from earlier years ^[1].

How FINRA polices underwriting compensation

FINRA Rule 5110 bars member firms from participating in a public offering whose terms, including the aggregate amount of underwriting compensation, are unfair or unreasonable ^[3]. It defines underwriting compensation broadly as any payment, right, interest or benefit received from any source for underwriting, allocation, distribution, advisory and other investment banking services in connection with a public offering, including finder's fees, underwriter's counsel fees and securities ^[3]. Each item of underwriting compensation, with its dollar amount, must be described in the distribution section of the prospectus ^[3].

• Expense allowances: a non-accountable expense allowance above 3% of offering proceeds is prohibited ^[3].
• Upfront payments: underwriting compensation paid before sales begin is prohibited, except advances against accountable expenses actually anticipated and certain advisory fees for an offering that is later completed ^[3].
• Termination fees: if an offering is not completed, a termination fee is allowed only under a written agreement meeting conditions, including that the issuer owes it only if a transaction closes within two years after the issuer ends the engagement ^[3].
• Rights of first refusal: a right to participate in future financings lasting more than three years is prohibited ^[3].

Retainers and success fees in advisory work

Selling a company or raising a private round usually involves months of work that may not end in a deal. A retainer compensates the bank for that effort and signals the client's commitment; the success fee aligns the bank with getting a transaction done. Success fees are what regulators call transaction-based compensation. The SEC lists receiving commissions or compensation based on the outcome or size of a transaction as a sign that someone is acting as a broker and would likely have to register ^[5]. It warns that a person may need to be registered if a company intends to pay them transaction-related compensation to help raise capital or sell the company, and that noncompliance can lead to lawsuits, rescission and future capital-raising challenges ^[5].

Private-placement fees leave a partial public trail. Form D filings report sales commissions and finders' fees, and FINRA economists used those fields to tell broker-dealer deals apart from finder deals ^[6]. In their sample, around eight percent of new Regulation D deals used broker-dealers and less than one percent used finders ^[6].

Contingent fees also create conflicts worth disclosing. When a FINRA member issues a fairness opinion that will be provided or described to public shareholders, Rule 5150 requires it to disclose whether it will receive compensation contingent on the transaction's completion, and any material relationships with the parties during the past two years that produced or are expected to produce compensation ^[4].

What to look for in a fee section

• Scope: which transactions the fee covers (for example, sale of the company, a minority investment or debt financing).
• Retainer: amount, timing and whether it is credited against the success fee.
• Success fee: the base it is calculated on and how non-cash or deferred consideration is valued.
• Expenses: caps and approval requirements.
• Tail: how long after termination a fee is still owed if a deal closes with a party introduced during the engagement.
• Future rights: any right of first refusal on later financings, and its duration.

Key terms

Gross spread

The difference between the price investors pay in an underwritten offering and the amount the issuer receives; the underwriters' primary compensation.

Underwriting compensation

Under FINRA Rule 5110, any payment, right, interest or benefit received for investment banking services in connection with a public offering.

Non-accountable expense allowance

A flat expense payment not tied to documented costs; capped at 3% of offering proceeds under FINRA Rule 5110.

Retainer

A fixed fee paid to an adviser regardless of whether a transaction closes.

Success fee

A fee payable only if a transaction is completed, usually calculated on its value.

Tail provision

A clause entitling the adviser to a fee if a deal closes within a set period after the engagement ends.

Right of first refusal (ROFR)

A bank's contractual right to participate in a client's future financings; FINRA prohibits ROFRs in public offerings lasting more than three years.

Transaction-based compensation

Pay tied to the outcome or size of a securities transaction; a key indicator of broker activity.

Check your understanding

Sources

1. [1]Jay R. Ritter, University of Florida Warrington College of Business, “Initial Public Offerings: Underwriting Statistics Through 2025,” May 26, 2026.
2. [2]U.S. Securities and Exchange Commission, Office of Investor Education and Advocacy, “Investor Bulletin: Investing in an IPO,” February 2013.
3. [3]FINRA, “5110. Corporate Financing Rule — Underwriting Terms and Arrangements,” Accessed November 2026.
4. [4]FINRA, “5150. Fairness Opinions,” Accessed November 2026.
5. [5]U.S. Securities and Exchange Commission, “Broker-Dealers,” April 24, 2026.
6. [6]FINRA Office of the Chief Economist, “The Roles of Broker-Dealers in Regulation D Offerings, 2013-2022,” January 24, 2025.

Educational content only — not legal, tax, or investment advice, or an offer to sell or a solicitation of an offer to buy any security. Rules and data are described as of November 2026 and may change. Securities offered through Umergence LLC, Member FINRA/SIPC.