Back Stop
Candlefocus EditorBack Stop works by ensuring that the offering is successful even if all the shares are not subscribed. The underwriter or investor that provides the back stop will purchase any remaining or unsubscribed shares at a previously agreed-upon price. This price is usually the same, or lower, than the market price of the stock during the initial offering.
Back stop is commonly used when a company is going through an Initial Public Offering (IPO) or a secondary offering. Investment banks, individual investors, or publicly traded companies sometimes provide back stop agreements when a company is going through a capital raising event. The majority of back stops are provided by the underwriter involved in the offering.
In addition, back stops can also be provided as part of an exchangeable security agreement or as a private purchase agreement. Exchangeable securities are a type of debt instrument that can be exchanged for shares of another company's stock. As part of an exchangeable security agreement, an investor can agree to provide back stop protection if the company’s stock price drops below a predetermined level. Private purchase agreements, on the other hand, are negotiated arrangements between a company and an investor to purchase additional shares, usually at a discounted rate, if the offering does not sell all of the available shares.
Back Stops provide necessary support for all securities offerings. They can enable companies to have a successful capital raising event even if not all of the shares are bought by the public. Without back stops, if a company did not sell all of the offered shares, they could be forced to return the money they raised, delaying any potential growth. Furthermore, without back stops, some investors may not be willing to buy into an offering since their investments could be at risk if all of the shares are not sold.
Overall, Back Stops are essential in making sure that a company’s security offering is successful. It provides necessary support and “insurance” to the offering by ensuring that there will be a market for any remaining shares. As a result, Back Stops help to provide companies with the capital they need to grow and succeed.