Issuing Corporate Securities - Underwriting Corporate Securities

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. Investing Basics

    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. Investing Basics

    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.
  4. Options & Futures

    Greenshoe Options: An IPO's Best Friend

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

    What Does an Underwriter Do?

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

    Brokerage Functions: Underwriting And Agency Roles

    Learning about these various activities can give insight into how securities are issued and traded.
  9. Stock Analysis

    U.S. Insurers Turn A Major Corner

    After suffering, the property and casualty insurance industry is back. The group has reported their first underwriting profit since 2009. That’s an important milestone.
  10. Bonds & Fixed Income

    Basics Of Federal Bond Issues

    Treasuries are considered the safest investments, but they should still be analyzed when issued.
RELATED TERMS
  1. Negotiated Underwriting

    A process in which both the purchase price and the offering price ...
  2. Underwriting Agreement

    A contract between a group of investment bankers who form an ...
  3. Underwriting Fees

    Underwriting fees are monies collected by underwriters for performing ...
  4. Underwriting Risk

    The risk of loss borne by an underwriter. Underwriting risk generally ...
  5. Underwriter

    An underwriter is a company or other entity that administers ...
  6. Underwriting Spread

    The spread between the amount underwriters pay an issuing company ...
RELATED FAQS
  1. Do underwriters make guarantees to sell an entire IPO issue?

    Underwriters represent the group of representatives from an investment bank whose main responsibility is to complete the ... Read Answer >>
  2. How does insurance underwriting differ from investment underwriting?

    Understand the difference between insurance underwriting and investment underwriting, including what types of risks an underwriter ... Read Answer >>
  3. How do I become an underwriter?

    Learn about the education, training and certification required to become an insurance underwriter as well as the important ... Read Answer >>
  4. What are examples of risks for all underwriter types?

    Learn about the risks faced by different types of underwriting activity. Explore specific examples of risks faced by insurance ... Read Answer >>
  5. What does the underwriter do in a new stock offering?

    Learn the role an underwriter plays for an initial public offering, and the steps an underwriter takes in preparing for an ... Read Answer >>
  6. What is real estate underwriting?

    See how underwriters for major lenders scrutinize real estate loans and manage their risk, and learn the origin of the term ... Read Answer >>
Hot Definitions
  1. Reverse Mortgage

    A type of mortgage in which a homeowner can borrow money against the value of his or her home. No repayment of the mortgage ...
  2. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  3. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  4. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  5. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  6. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
Trading Center