Issuing Corporate Securities - Types Of Underwriting Commitments

Firm Commitment

In a firm commitment underwriting, the underwriter guarantees to purchase all of the securities being offered for sale by the issuer regardless of whether or not they can sell them to investors. A firm commitment underwriting agreement is the most desirable for the issuer because it guarantees them all of their money right away. The more in demand the offering is, the more likely it is that it will be done on a firm commitment basis. In a firm commitment, the underwriter puts their own money at risk if they can’t sell the securities to investors.

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. An example of when an underwriter could invoke the market out clause would be if the issuer was a bio tech company and the FDA just denied approval of the company's new drug.

Best Efforts

In a best efforts underwriting, the underwriters will do their best to sell all of the securities that are being offered by the issuer, but in no way is the underwriter obligated to purchase the securities for their own account. The lower the demand for an issue, the greater likelihood that it will be done on a best efforts basis. Any shares or bonds in a best efforts underwriting that have not been sold will be returned to the issuer.


A mini-maxi is a type of best efforts underwriting that does not become effective until a minimum amount of the securities have been sold. Once the minimum has been met, the underwriter may then sell the securities up to the maximum amount specified under the terms of the offering. All funds collected from investors will be held in escrow until the underwriting is completed. If the minimum amount of securities specified by the offering cannot be reached, the offering will be canceled and the investors’ funds that were collected will be returned to them.

All or None / AON

With an all or none underwriting, the issuer has determined that it must receive the proceeds from the sale of all of the securities. Investors’ funds are held in escrow until all of the securities are sold. If all of the securities are sold, the proceeds will be released to the issuer. If all of the securities are not sold, the issue is canceled and the investors’ funds will be returned to them.


A standby underwriting agreement will be used in conjunction with a preemptive rights offering. All standby underwritings are done on a firm commitment basis. The standby underwriter agrees to purchase any shares that current shareholders do not purchase. The standby underwriter will then resell the securities to the public.

Series 62 exam tutoring

Types Of Offerings
Related Articles
  1. Professionals

    Series 99

    FINRA/NASAA Series 99 Exam Guide
  2. Professionals

    Series 24

    FINRA/NASAA Series 24 Exam Guide
  3. Professionals

    Becoming A Registered Investment Advisor

    To become a registered investment advisor requires specific licensing, qualifications and regulations, but the greater freedom may be worth it.
  4. Investing Basics

    How To Handle A Serious Dispute With Your Broker

    Find out what to do if you have a dispute with your broker.
  5. Professionals

    Hedge Funds and the Law

    Learn how hedge funds have gotten in trouble for illegal insider trading. Read about questionable high-frequency trading (HFT) strategies.
  6. Professionals

    Career Advice: Financial Analyst Vs. Investment Banker

    Read an in-depth comparison about working as a Financial Analyst vs. working as an Investment Banker, two highly prestigious business careers.
  7. Professionals

    Who Needs to Take the Series 65?

    Most states require individuals to pass the Series 65 exam in order to act as investment advisors.
  8. Investing Basics

    How to Vet Financial Advisors Via BrokerCheck

    Many people research restaurants or movies, but few select brokers or financial advisors with much research. Here's how BrokerCheck can help.
  9. Professionals

    Career Advice: Financial Planner Vs. Stockbroker

    Read an in-depth review of a career as a financial planner as opposed to a career as a stockbroker, including how to decide which is best for you.
  10. Term

    Understanding the Maintenance Margin

    A maintenance margin is the minimum amount of equity that must be kept in a margin account.
  1. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin ...
  2. Series 6

    A securities license entitling the holder to register as a limited ...
  3. Comprehensive Automated Risk Data ...

    The Comprehensive Automated Risk Data System (CARDS) is an initiative ...
  4. Corporate Financing Committee

    A regulatory group that reviews documentation that is submitted ...
  5. Series 79

    A examination to ensure a candidate is qualified to become a ...
  6. Research Analyst

    A person who prepares investigative reports on equity securities. ...
  1. How does FINRA differ from the SEC?

    With all the financial organizations out there, knowing what they all do can be as complicated as knowing where to invest. ... Read Full Answer >>
  2. How can I find out if my employer is a member of FINRA?

    To find out if your employer is a member of the Financial Industry Regulatory Authority or FINRA (previously the National ... Read Full Answer >>
  3. I have a CFA designation. Do I qualify for any exemptions from FINRA licensing exams?

    Unfortunately, a CFA charter does not qualify you for any FINRA exam exemptions. Read Full Answer >>
  4. Am I qualified once I complete my FINRA certification exam?

    Even if you have completed your Financial Industry Regulatory Authority or FINRA (previously the National Association of ... Read Full Answer >>
  5. Are hedge funds regulated by FINRA?

    Alternative investment vehicles such as hedge funds offer investors a wider range of possibilities due to certain exceptions ... Read Full Answer >>
  6. How are variable annuities regulated?

    The sale of a variable annuity is regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory ... Read Full Answer >>
Hot Definitions
  1. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  2. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  3. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  4. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  5. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  6. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
Trading Center