Once a business has decided that it needs to raise capital to meet its organizational objectives, they must determine how to raise the needed capital. Most corporations at this point will hire an investment banker, also known as an underwriter, to advise them. The underwriter works for the issuer and it is their job to advise the client about what type of securities to offer. The issuer and the underwriter together determine whether stocks or bonds should be issued and what the terms will be. The underwriter is responsible for trying to obtain the financing at the best possible terms for the issuer. The underwriter will:

  • Market the issue to investors
  • Assist in the determination of the terms of the offering
  • Purchase the securities directly from the issuer to resell to investors

The issuer is responsible for:

  • Filing a registration statement with the SEC
  • Registering the securities in the states in which it will be sold, also known as blueskying the issue
  • Negotiating the underwriter’s compensation and obligations to the issuer

Types of Underwriting Commitments

The agreement between the issuer and the underwriter spells out the underwriter’s responsibilities to the issuer. The agreement may take a variety of forms and may include:

  • Firm commitment
  • Best efforts
  • Mini-maxi
  • All or none
  • Standby

Market Out Clause

An underwriter offering securities for an issuer on a firm commitment basis is assuming a substantial amount of risk. As a result, the underwriter will insist on having a market out clause in the underwriting agreement. A market out clause would free the underwriter from their obligation to purchase all of the securities in the event of a development that impairs the quality of the securities or that adversely affects the issuer. Poor market conditions are not a reason to invoke the market out clause. If a syndicate was in the process of taking a biotech company public and while the issue is in registration the FDA elects not to approve the company's main drug for sale the syndicate could invoke the market out clause.

Series 55 Textbooks & Software



Types Of Offerings

Related Articles
  1. Insurance

    What is Underwriting?

    Underwriting is a term most often used in investment banking, insurance and commercial banking. Generally, underwriting means receiving a remuneration for the willingness to pay for or incur ...
  2. Insurance

    Is Insurance Underwriting Right For You?

    If you have excellent analytical skills and an eye for detail, this may be your calling.
  3. Insurance

    What Does an Underwriter Do?

    In the investment world, an underwriter is a company that helps corporations or other issuing bodies distribute their securities.
  4. Insurance

    What is a Greenshoe Option?

    A greenshoe option is a provision in an underwriting agreement that allows the underwriter to buy up to 15% of the shares in an IPO at the offer price.
  5. Trading

    Greenshoe Options: An IPO's Best Friend

    Find out how companies can save or boost their public offering price with these options.
  6. Insurance

    The Rise Of The Modern Investment Bank

    Get to know a little bit about the institutions whose actions help to guide free markets.
  7. Insurance

    Brokerage Functions: Underwriting And Agency Roles

    Learning about these various activities can give insight into how securities are issued and traded.
  8. Investing

    Corporate Bonds and the Importance of Covenants

    Any type of investor, private or institutional, should be acquainted with the significance of covenants in corporate bond agreements.
  9. Investing

    Basics Of Federal Bond Issues

    Treasuries are considered the safest investments, but they should still be analyzed when issued.
  10. Insurance

    IPO Flippers And The Companies Who Hate Them (TWTR, ETSY)

    Learn how flipping activity affects an initial public offering.
Trading Center