Standby Underwriting (Standby)

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DEFINITION of 'Standby Underwriting (Standby)'

A type of agreement to sell shares in an initial public offering (IPO) in which the underwriting investment bank agrees to purchase whatever shares remain after it has sold all of the shares it can to the public. In an underwriting standby (standby) agreement, the underwriter agrees to purchase any remaining shares at the subscription price, which is lower than the stock's market price. This underwriting method guarantees the issuing company that its IPO will raise a certain amount of money.

INVESTOPEDIA EXPLAINS 'Standby Underwriting (Standby)'

Although the ability to buy shares below the market price may appear to be an advantage of standby underwriting, the fact that there are shares left over for the underwriter to purchase indicates a lack of demand. Standby underwriting thus transfers risk from the company that is going public (the issuer) to the investment bank (the underwriter). Because of this additional risk, the underwriter's fee may be higher. Other options for underwriting an IPO include a firm commitment and a best efforts agreement.

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