How Many Types of Underwriting Agreements Are There

When a company intends to raise capital through the issuance of securities, it often needs an underwriter to facilitate the process. An underwriter is a financial entity that purchases the securities from the issuer and then resells them to interested investors. Underwriting agreements are the contracts that govern this process, and they can take several different forms.

1. Firm Commitment Underwriting

This is the most common type of underwriting agreement. In a firm commitment underwriting, the underwriter agrees to purchase all of the offered securities from the issuer and then resell them to investors. The underwriter assumes the risk associated with selling the securities and may have to hold on to them if investor demand is lower than anticipated.

2. Best Efforts Underwriting

In a best efforts underwriting, the underwriter does not agree to purchase all of the offered securities from the issuer. Instead, the underwriter agrees to use its best efforts to sell as many securities as possible, and the issuer assumes the risk of any unsold securities. This type of underwriting is often used when the issuer is less certain about investor demand for the securities.

3. All-or-None Underwriting

In an all-or-none underwriting, the issuer sets a minimum number of securities that must be sold for the offering to be considered successful. The underwriter only agrees to purchase the securities if the minimum number is met. If the minimum is not met, the underwriter does not purchase any securities, and the offering is considered a failure.

4. Standby Underwriting

Standby underwriting is often used in connection with rights offerings. In this type of underwriting, the underwriter agrees to purchase any securities that are not purchased by the existing shareholders. This ensures that the issuer will receive the capital it needs, even if existing shareholders do not exercise their rights to purchase additional securities.

5. Bought Deal Underwriting

In a bought deal underwriting, the underwriter agrees to purchase all of the offered securities from the issuer and then resell them to investors. The difference between a bought deal and a firm commitment underwriting is that in a bought deal, the price at which the securities will be sold to investors is agreed upon upfront.

In conclusion, there are several different types of underwriting agreements. The choice of which type to use will depend on the issuer`s needs and the underwriter`s willingness to assume risk. It`s essential to have a clear and well-defined underwriting agreement in place to ensure that the process of raising capital runs smoothly and all parties involved are protected.