Which of the following types of underwriting commitments are the underwriters acting as agents?

Underwriting and Private Placement Fraud and Misrepresentation Litigation and FINRA Arbitration Attorney, Russell L. Forkey, Esq.

What is the difference between a “firm commitment” and a “best efforts underwriting”? A lot. So much so that it could have a material impact on the success of the underwriting and a substantial impact on the issuer. The purpose of this post is to provide the reader with some general educational information, concerning the difference between the two and a minor description of a standby commitment. However, this information is not designed to be complete in all material respects. Thus, it should not be relied upon as legal or investment advice. If you have any questions relative to the following, you should discuss the same with a qualified professional.

Firm Commitment

This is an arrangement whereby an investment bank enters into a written agreement, with the issuer of the securities, to make an outright purchase from the issuer of securities to be offered to the public. The underwriter, as the investment banker, is required to make its profit on the difference between the purchase price — determined through either competitive budding or negotiation — and the public offering price. Firm commitment underwritings are to be distinguished from conditional arrangements for distributing new securities, such as standby commitments and best efforts commitments.

In a firm commitment underwriting, the issuer already knows, at the time the registration statement becomes effective how much money it is going to receive from the offering. Usually, firm commitment underwriting is only done for higher quality companies or where the investment bank as obtained indications of interest, which reflect that it will be able to resell the shares that it is purchasing from the issuer.

Best Efforts

In this type of offering, investment bankers, acting as agents, agree to do their best to sell an issue to the public. Instead of buying the securities outright, these agents have an option to buy and an authority to sell the securities. Depending on the contract, the agents exercise their option and buy enough shares to cover their sales to clients, or they cancel the incompletely sold issue altogether and forego the fee. Best efforts deals entail risks and delays from the issuer’s standpoint. For the most part, the best efforts deals that are seen today are handled by firms specializing in the more speculative securities of new and unseasoned companies.

Standby Commitment

This is an agreement between a corporation (the issuer) and an investment banking firm (the standby underwriter) whereby the latter contracts to purchase for resale, for a fee, any portion of a stock issue offered to current shareholders in a “rights” offering that is not subscribed to during the two- to four-week standby period. A right, often issued to comply with laws guaranteeing the shareholder’s preemptive right, entitles its holder, either an existing shareholder or a person who has bought the right from a shareholder to purchase a specified amount of shares before a public offering and usually at a price lower than the public offering price.

A corporation wishes to raise capital by issuing common stock to the public. The corporation would select which of the following to advise them on the stock issuance?

Or underwriter, help structure new securities offerings; decide the pricing of the issue based on market conditions; and underwrite the issue either as a principal (firm commitment) or as an agent (best efforts). Investment bankers also advise companies on mergers, acquisitions, divestitures and spin-offs.

Company agrees with the basic specifications of the issue and retains the underwriter to handle the issue. spelling out the basic underwriting terms. type of security to be sold, size of the issue, total par value, estimated public offering price, estimated interest rate, underwriters spread, and underwriting commitment. 

types of underwriting commitments

• Firm commitment
• Best efforts
• All or none
• Mini-maxi
• Stand by

(standby style) which the underwriter, acting as a principal, agrees to buy all of an issuer's new securities and then resell sell them to the public. The issuer is, therefore, guaranteed its funds and the underwriter assumes full financial liability if the security cannot be sold to the public.

underwriter, acting as an agent, agrees to sell an issuer's new securities to the public on demand. Any amount of the securities that remain unsold is returned to the issuer. The underwriter, therefore, assumes no financial liability if the security cannot be sold to the public.

investment banker, acting as an agent, agrees to complete the terms of the underwriting agreement if, and only if, the entire new issue sells out. If it is not entirely sold, then the underwriting is canceled and all monies are returned to any investor who bought the issue. An underwriting agreement where the syndicate members are not liable for any unsold securities.

investment banker makes an all or none commitment on a minimum amount of the new issue and a best efforts commitment to continue selling more of the issue until a maximum specified amount is sold.

investment banker makes a firm commitment to stand by, ready to buy any of the unsold shares after the issuer attempts to sell its new shares to existing shareholders who have been granted subscription rights. In this manner, the corporation is assured of raising the full amount of money needed.

used for virtually all new issues of corporate securities and municipal revenue bonds, a type of underwriting in which the issuer and the underwriting negotiate all of the terms of the letter of intent and subsequent underwriting.

a group of investment banking firms that, with the lead underwriter(s), shares in the financial responsibility and liability of offering and selling new issues to the public. Each syndicate member firm signs a document in which it agrees to share in the profit and the financial liability associated with the underwriting.

Types of Syndicate Accounts

Western and Eastern Account

each syndicate member takes a specified amount of the issue and is responsible only for that amount. The performance of the other syndicate members has no effect on his results.

syndicate members share in the selling responsibility and liability as a group. The account is "undivided." This is the usual arrangement for municipal underwritings 

When selecting syndicate members for a new corporate bond offering, the managing underwriter will consider the potential member's:

Financial capability to handle its portion of the offering , track record in past underwritings, geographic location

In an underwriting, earned by a syndicate member who sells the issue directly to the public

Underwriters Concession, that portion of the underwriting spread which the managing underwriter concedes or gives to the syndicate members in a corporate securities underwriting for each new issue security they sell directly to the public

In a corporate underwriting, a syndicate member that has sold its portion, wishes to place additional orders to be filled from the unsold allocations of other members. These orders

will be filled by the manager with the ordering member receiving the selling concession

members of the syndicate and selling group earn the following:

Spread, underwriter's concession, selling concession, reallowance

the gross compensation that an underwriter receives for distributing a new issue

that portion of the underwriting spread which the managing underwriter concedes or gives to the syndicate members in a corporate securities underwriting for each new issue security they sell directly to the public.

in a negotiated underwriting, that portion of the underwriting spread which the managing underwriter, with the agreement of the syndicate members, concedes or gives to the selling group members for each new issue security they sell directly to the public

A "reallowance" is a discount given to a

non-member of the underwriting "group"

Responsibility for printing and delivering stock certificates in a new issue offering rests with the

In a corporate new issue offering, the underwriter's responsibilities include?

Managing the syndicate account and Selling the securities and Determining each syndicate member's participation

During the 20-day "cooling-off" period when a new issue is in registration, what is allowed?

preliminary prospectus can be distributed to interested customers.

sent to potential purchasers of a new non-exempt securities issue during the 20-day cooling off period under the Securities Act of 1933, has the financial statements of the issuer. Legally, the preliminary prospectus does not offer the securities, since this is prohibited during the cooling off period. The red herring is used to get an indication of the public's interest in a security before the final price is set and the security is issued. 

Acceptance of an "indication of interest" for a registered offering during the 20 day cooling off period?

The indication can be canceled by the customer. The indication can be canceled by the brokerage firm

New issues are sold under a prospectus and New issues are sold at the Public Offering Price

the issuance of new securities by a company to the public under a prospectus as required under the Securities Act of 1933, unless an exemption from registration is available. The net proceeds from the offering go to the issuer.

the sale (or more accurately resale) to the general public in a prospectus offering under the provisions of the Securities Act of 1933 of securities previously issued to large investors, such as institutions and insiders. The net proceeds of the offering go to the selling shareholders.

the marketing of a large block of stock by one or more exchange member firms who solicit buy (or sell) orders that will enable them to execute the large trade. Once enough orders are accumulated, the "matched" trade is sent to the Specialist where it is crossed on the exchange floor. Large block orders used to be handled by this method so that the trade did not cause a wild price swing in the stock. An "ex-d," as it is often called, is rarely performed today. It has been replaced by block positioning, which is much faster and easier.

when a broker-dealer uses its own funds to buy a large block of securities into its own inventory from a large customer who wishes to sell. This benefits the customer, who wishes to be paid in full for selling the large block, as opposed to selling the issue piecemeal into the market. The broker-dealer assumes the market risk of the price of the issue dropping prior to reselling the position. Large block orders are handled in this way so as not to disrupt the market.

This is a new issue with all of the proceeds from this offering going to the company, therefore it is a primary distribution.

All of the following information would be found in a new issue "tombstone" announcement

Names of the underwriters , aggregate offering price, type of security offered

Which of the following are prohibited from buying an IPO directly from an underwriter?

An officer of a registered investment company and An officer of an insurance company

a merger of two companies in the same industry. For example, two ice cream manufacturers merging is a horizontal merger. 

a merger of two companies in different, but usually related, industries. For example, an ice cream manufacturer that buys a dairy farm is a vertical merger.

A U.S. automobile manufacturer buys a Korean automobile manufacturer. This is a

a government ordered divestiture of a company's subsidiary or subsidiaries because of anti-trust concerns. 

a corporation, that has a subsidiary that it feels will perform better as an independent company, may "spin-off" that business by giving its existing shareholders the subsidiary as a new independent company in a separate stock offering.

the purchase of all of the outstanding shares of a publicly traded company, with the monies used to purchase the shares coming from a bank loan; or the sale of long term bonds (hence the term Leveraged Buy Out). Once the company has been bought out, new management will reduce costs; and sell assets; to generate funds to pay down the debt incurred in the LBO.financing for the takeover is provided by a commercial bank or by issuing junk bonds

An automobile manufacturer decides to distribute shares of its parts making subsidiary to existing shareholders as a separate operating company. This is a

To set the price for a new corporate stock issue, the syndicate manager will consider all of the following

expected demand for the security by investors , expected earnings for the company over the coming years, price/earnings ratios for similar companies already trading

Which of the following are types of underwriting commitments are the underwriters acting as agents?

Which of the following are types of underwriting commitments?

What are the three types of underwriting?

What are underwriting commitments?