In 1990, a US company going public paid its underwriting syndicate approximately 7% of the gross proceeds. In 2000, the fee was approximately 7%. In 2010, 2020, and today — still approximately 7%. This is a number that has held with remarkable stability across three decades of financial innovation, across the digitization of trading, the collapse of brokerage commissions to zero, and the emergence of technology that has eliminated intermediation costs in nearly every adjacent market. The gross spread on US IPOs has not moved.
Economists have a name for this phenomenon. Jay Ritter of the University of Florida, who has tracked IPO economics for decades, calls it the "7% solution" — a term that in the academic literature is not entirely complimentary. A market where prices have remained static while technology has transformed the underlying cost structure is, by definition, a market where competitive pressure is not functioning normally. Either the service is genuinely worth 7% of gross proceeds, or the market is structured in a way that prevents competition from exposing that it isn't.
The evidence points to the latter. And tokenized equity issuance is, slowly, building the infrastructure that could finally test it.
What Underwriters Actually Do
The case for the 7% fee is not entirely without substance. Investment bank underwriters provide a bundle of services that are genuinely difficult to disaggregate. They conduct due diligence and prepare the registration statement — a process that involves hundreds of lawyers, accountants, and analysts working across months. They run the roadshow — the orchestrated series of presentations to institutional investors that functions as the primary mechanism for building an order book before pricing. They provide price discovery, using their relationships with institutional accounts to gauge demand and set an offering price. And they provide aftermarket stabilization — buying shares in the secondary market after listing if the price falls below the offering price, preventing a catastrophic first-day collapse that would damage the company's reputation and their own.
Each of these functions addresses a trust problem. The due diligence and registration process asserts to investors that the company's disclosures are accurate and that the bank has staked its reputation on that assertion. The roadshow substitutes the bank's investor relationships for the company's non-existent ones. Price discovery relies on the bank's proprietary knowledge of what institutional investors will pay. Aftermarket stabilization uses the bank's balance sheet to absorb risk that the issuing company cannot absorb itself.
These are real functions. They are not, however, functions that require 7% of gross proceeds to perform at current technology costs. The gap between what the process actually costs and what issuers pay represents, in the academic literature's blunt assessment, a transfer from issuing companies to investment banks enabled by a structurally uncompetitive market.
The 7% gross spread on US IPOs has remained essentially unchanged since the 1990s — a period during which stock trading commissions fell from dollars per share to fractions of a cent, and bond trading costs compressed by an order of magnitude. Static fees in a digitizing market are not a sign of enduring value creation. They are a sign of protected market structure.
How the Market Stays Uncompetitive
The IPO underwriting market's resistance to competition has been studied extensively, and the structural explanations are well-established.
The first is reciprocal business flow. The institutional investors who participate in IPO allocations — the accounts that receive shares at the offering price before public trading begins — are the same institutions that generate trading commissions, custody fees, and advisory mandates for the banks that allocate those shares. A bank that competes aggressively on underwriting fees risks disrupting a web of commercial relationships that generates far more revenue than the fees it might gain from cutting its IPO spread. The fee is partly a signal of commitment to the institutional investor network that makes the whole system function.
The second is information asymmetry on the issuer side. Companies go public once. Investment banks participate in hundreds of IPOs per year. The issuer negotiating an underwriting agreement is structurally disadvantaged — it lacks the market knowledge, the comparables, and the repeat-player incentives that would allow it to push back effectively on fee terms. The banks know what every comparable deal paid; the issuer typically knows only what its bankers tell it.
The third, and most durable, is the network effect of investor relationships. The argument that underwriters make most persuasively is that their value is not the paperwork or the stabilization — it's the access. A Tier 1 bank's IPO allocation list includes the sovereign wealth funds, the large pension managers, the hedge funds, and the mutual fund complexes that move markets. An issuer that bypasses the underwriting syndicate is, in the banks' framing, cutting itself off from that distribution. This argument has significant truth to it, which is why alternatives to traditional underwriting have historically underperformed on first-day price performance and aftermarket liquidity.
The Direct Listing Experiment
The clearest test of the underwriter's distribution monopoly to date has been the direct listing — a mechanism by which a company lists on a public exchange without issuing new shares and without using an underwriting syndicate to sell them. Spotify pioneered the format in 2018. Slack, Palantir, Coinbase, and Roblox followed.
The results were instructive. Direct listings worked — in the sense that all of these companies successfully achieved public market liquidity without paying the 7% spread. They did not work uniformly well on every metric. Price discovery on the first day of trading was more volatile in some cases, because the absence of the bookbuilding process removed the institutional anchoring that roadshows provide. And direct listings are only available to companies with existing shareholder bases that want to sell, not to companies raising new capital — a structural limitation that has kept the format as a niche option rather than a mainstream alternative.
What direct listings demonstrated is the proposition that the underwriter's distribution network is not irreplaceable, at least for a specific class of high-profile issuers. For a Spotify or a Coinbase, brand recognition and investor interest exist independently of whatever Goldman Sachs or Morgan Stanley can manufacture through a roadshow. The bank's value-add is more modest than the fee implies, for that category of issuer.
For smaller companies without established investor recognition, the calculation is different — and that is where the underwriting market has always been most defensible.
What Tokenized Equity Issuance Changes
The tokenization approach to equity issuance is still early-stage, and claims about its near-term threat to Wall Street underwriting should be treated skeptically. The current landscape consists primarily of security token offerings (STOs) on platforms like Securitize, Tokeny, and a small number of blockchain-native exchanges. Total capital raised through tokenized equity channels remains a fraction of a percent of traditional IPO volume. The regulatory frameworks required for tokenized equity to access mainstream institutional capital are still being developed in the US, EU, and UK.
But the architecture being built addresses the right problems. A blockchain-based equity issuance platform can, in principle, replace several of the functions for which underwriters charge the 7% spread. Smart contracts can automate transfer agent functions — the record-keeping and shareholder communication processes that currently require both a transfer agent and the underwriting bank's operations infrastructure. Tokenized shares can be traded on automated market makers or order book exchanges that don't require the aftermarket stabilization that banks provide, because the liquidity mechanism is embedded in the protocol. Investor verification and accreditation can be handled on-chain, reducing the compliance overhead that currently flows through the underwriting syndicate.
What tokenized issuance cannot yet replace is the investor network. The institutional accounts that underwriters bring to an IPO allocation are not on-chain. Their compliance infrastructure, their investment mandates, and their operational workflows are built around traditional custody and settlement systems. Getting a large pension fund to participate in a tokenized equity offering requires not just a viable token platform but a wholesale change in that fund's operational and regulatory posture — a change that will take years to materialize at the scale required.
The Realistic Path and Its Timeline
The underwriting fee will not collapse next year, or probably the year after. The mechanisms that protect it — investor network lock-in, issuer information asymmetry, regulatory frameworks designed around the traditional issuance process — are durable in the near term.
The more likely near-term development is compression at the margins: smaller issuers, who already receive less favorable terms from bulge-bracket banks and are often forced into less capable regional underwriters, will find that tokenized issuance platforms offer a credible alternative for raising capital from retail and smaller institutional investors. The SEC's Regulation A+ and Regulation Crowdfunding frameworks already enable this at modest scale. Tokenization extends the reach and reduces the cost.
The longer-term trajectory depends on whether institutional investor operations infrastructure adapts to tokenized assets — which it will, slowly, as custody, settlement, and compliance systems are rebuilt on blockchain rails. If BlackRock's BUIDL fund, Franklin Templeton's on-chain money market, and JPMorgan Onyx are the leading edge of institutional infrastructure migration, then the investor network that underwrites the underwriter's monopoly is, over a decade-long horizon, moving to a substrate where programmable issuance is native. When the investors are on-chain, the argument that you need a Tier 1 bank to access them becomes substantially weaker.
The 7% gross spread has held for thirty years because the trust infrastructure it represents had no credible challenger. The challenger is now being built, institution by institution, protocol by protocol. The fee will move. The only genuinely open question is whether the banks that currently charge it will be the ones building its replacement, or whether they will be disintermediated by the infrastructure they declined to construct themselves.