Firm_commitment_contract

Underwriting contract

Underwriting contract

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In investment banking,[1] an underwriting contract[2] is a contract between an underwriter and an issuer of securities.

The following types of underwriting contracts are the most common:

  • In the firm commitment contract, the underwriter guarantees the sale of the issued stock at the agreed-upon price. For the issuer, it is the safest but the most expensive type of the contracts, since the underwriter takes the risk of sale.[2]
  • In the best efforts contract, the underwriter agrees to sell as many shares as possible at the agreed-upon price.[2]
  • Under the all-or-none contract, the underwriter agrees either to sell the entire offering or to cancel the deal.[2]

Stand-by underwriting,[3] also known as strict underwriting or old-fashioned underwriting is a form of stock insurance: the issuer contracts the underwriter for the latter to purchase the shares the issuer failed to sell under stockholders' subscription and applications.[4]

References

  1. [1]
    "Underwriting". Corporate Finance Institute. Retrieved 2022-11-16.
  2. [2]
    "The Investment Banking Handbook" by J. Peter Williamson, 1988, ISBN 0-471-81562-4 , ""Underwriting Contracts", p. 128
  3. [3]
    "What is Underwriting?". Robinhood. Retrieved 2022-11-16.
  4. [4]
    "The Law of Securities Regulation" by Thomas Lee Hazen, 1996, ISBN 0-314-08587-4, p. 405.
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