Underwriting agreements are essential in the process of issuing securities, such as stocks or bonds, to the public. These agreements are the formal contracts between the issuer of the securities and the underwriter, who acts as an intermediary in the sale of the securities. In this article, we will discuss the types of underwriting agreements.
1. Firm Commitment Underwriting
Firm commitment underwriting is the most common type of underwriting agreement. In this type of agreement, the underwriter agrees to purchase all of the securities from the issuer and then resell them to the public. The underwriter takes on the risk of not being able to sell the securities, but also stands to make a profit if they sell for a higher price than what they paid.
2. Best Efforts Underwriting
In a best efforts underwriting, the underwriter agrees to use their best efforts to sell the securities but is not obligated to purchase any unsold securities from the issuer. This type of agreement is typically used for riskier securities or when the issuer is unsure of the demand for the securities. The issuer bears the risk of any unsold securities.
3. All or None Underwriting
An all or none underwriting requires the underwriter to sell all of the securities or none at all. This type of agreement is used when the issuer needs to sell all of the securities to meet a specific financial goal. If the underwriter is unable to sell all of the securities, the offering is canceled, and no securities are sold.
4. Mini-Maxi Underwriting
A mini-maxi underwriting is a combination of the best efforts and all or none underwriting. The issuer sets a minimum and maximum number of securities to be sold, and the underwriter agrees to sell as many securities as possible between those two numbers. If the minimum number of securities is not sold, the offering is canceled, but if the maximum number is reached, the offering is closed.
5. Standby Underwriting
A standby underwriting is used when an existing shareholder wants to sell their shares but cannot find a buyer. The underwriter agrees to purchase the shares at a set price if no other buyer is found. This type of underwriting is typically used for stock buybacks or in the case of a merger or acquisition where shareholders are forced to sell their shares.
In conclusion, underwriting agreements are crucial in the process of issuing securities and offer different levels of risk and flexibility for both the issuer and underwriter. Understanding the types of underwriting agreements available can help both parties make informed decisions about the best way to sell securities to the public. As a professional, it`s important to make sure these agreements are explained clearly to ensure the article is informative and understandable to readers.