Underwriting contract
In investment banking, an underwriting contract is a contract between an underwriter and an issuer of securities.
The following types of underwriting contracts are most common:[1]
- 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.[1]
- In the best efforts contract the underwriter agrees to sell as many shares as possible at the agreed-upon price. [1]
- Under the all-or-none contract the underwriter agrees either to sell the entire offering or to cancel the deal. [1]
Stand-by underwriting, 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. [2]
References
- ^ a b c d "The Investment Banking Handbook" by J. Peter Williamson, 1988, ISBN 0471815624 , ""Underwriting Contracts", p. 128
- ^ "The Law of Securities Regulation" by Thomas Lee Hazen, 1996, ISBN 0314085874, p. 405.