Underwriting Agreements
Candlefocus EditorAn underwriting agreement is the contract between the investment bankers and the issuer of the securities issue. The agreement serves to ensure that everyone involved in the process understands their roles and responsibilities. In addition, the agreement outlines the underwriting group's commitment to purchase the new securities issue. This includes the agreed-upon price, the initial resale price, and the settlement date.
The agreement also stipulates the terms of how the underwriters and the issuer will be compensated for their role in the offering. Typically, the underwriters will receive a commission for their services as well as the opportunity to make a profit by reselling the securities to investors. For example, the underwriters may purchase the securities for a lower price than the price subsequently set for the public offering.
Moreover, the underwriting agreement outlines when and how the underwriters will be relieved of their obligations to purchase the securities. These terms are important to protect the rights of both parties involved in the process.
When it comes to structuring an underwriting agreement, there are several ways it can be done. These include best efforts,committed, and all-or-none underwriting agreements.
Best efforts agreements are the most common type of underwriting agreement and are subject to the least amount of risk for the underwriters. Under a best efforts agreement, the underwriting group is required to make a “good faith” attempt to sell the securities to investors, but there is no guarantee of success.
With a firm commitment, the underwriters undertake a bigger risk since they are committing to purchase all the securities that are offered. Typically, this type of agreement includes a risk-sharing agreement, where the underwriters will have to provide a portion of the financing for the sale if it is undersubscribed.
Lastly, an all-or-none underwriting agreement is typically used when the securities issue is large or complicated. In this type of agreement, the underwriters are required to purchase all of the securities if they choose to purchase any at all.
Underwriting agreements are an important part of the securities offering process. The agreement ensures everyone involved in the process understands their roles and responsibilities and serves to protect the rights of both parties. There are several ways to structure an underwriting agreement, ranging from the least risky best efforts agreement to the more complex all-or-none agreement.