Series 55

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.



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