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.

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Types Of Offerings
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