What is 'Best Efforts'

Best efforts is a contractual term in which an underwriter promises to make its best effort to sell as much of a securities offering (e.g., IPO) as possible. Best-effort agreements are used mainly for securities in a less-than-ideal market condition or with higher risk, such as an unseasoned offering.

BREAKING DOWN 'Best Efforts'

Best efforts relieve underwriters from responsibility for any inventory of shares they are unable to sell. The underwriter does not guarantee that it will sell the entire IPO issue in a best-efforts agreement. A best-efforts agreement limits both the underwriter's risk and the underwriter's profit potential since they receive a flat fee for their services.

In a best-efforts offering, the investment bank acts as an agent putting forth its best effort to sell the stock issue. The investment bank does not entirely buy the securities available to the public. Instead, the bank has an option to purchase only those shares that are sufficient to meet client demand. Alternatively, the bank can cancel the entire issue and forfeit the fee.

Best-efforts offerings sometimes contain conditions, such as all-or-none and part-or-none.  All-or-none offerings require the entire offering to sell for the deal to close. With a part-or-none offering, only a set amount of securities qualify to close the deal.

Investor funds must be returned promptly if contingency offerings are not realized, under the Financial Industry Regulatory Authority's (FINRA) SEA Rule 10b-9.

Best Efforts vs. Firm Commitment

Underwriters and issuers can handle public offerings in different ways. In contrast to a best-efforts agreement, a bought deal, also known as a firm commitment, requires the underwriter to purchase the entire offering of shares. The underwriter's profit is based on how many shares or bonds it sells, and on the spread between their discounted purchase price and the price at which they sold the shares.

Best Efforts Example

In September 2015, Aperion Biologics, Inc. filed an offering statement on Form 1-A with the Securities and Exchange Commission (SEC) to sell $20 million in an initial public offering. The agent, WR Hambrecht+ Co., employed a best efforts approach to selling the Aperion shares.

As defined in the Jumpstart Our Business Startups Act (JOBS), Aperion is a small company qualifying as an emerging growth company. For the fiscal year ending Sept. 30, 2015, revenue was $34,000. Considering the Aperion's small size, WR Hambrecht chose to underwrite a best-efforts offering to minimize their risk by not selling the shares.

The January 2016 filing registered 3.1 million Aperion shares, and the proposed price range of $7 to $9, with the shares offered on an all-or-none basis.

RELATED TERMS
  1. Underwriting Fees

    Underwriting fees are monies collected by underwriters for underwriting ...
  2. Underwriter

    An underwriter is any party that evaluates and assumes another ...
  3. Underwriting

    Underwriting is the acceptance of a specific transaction's risk ...
  4. Initial Offering Date

    An initial offering date is the date on which a security is first ...
  5. Transferable Underwriting Facility ...

    A transferable underwriting facility is a type of underwriting ...
  6. Underwriting Risk

    Underwriting risk is the risk of loss borne by an underwriter ...
Related Articles
  1. Insurance

    Is Insurance Underwriting Right For You?

    If you have excellent analytical skills and an eye for detail, this may be your calling.
  2. Trading

    Greenshoe Options: An IPO's Best Friend

    Find out how companies can boost their initial public offering price with these little-known options.
  3. Insights

    Energy Fuels Announces $10M Bought Deal Offering (UUUU)

    Energy Fuels will use the proceeds to fund various projects, including shaft sinking and evaluation at its high-grade Canyon mine project in Arizona.
  4. Personal Finance

    The Rise of the Modern Investment Bank

    Get to know a little bit about investment banks, the institutions whose actions help guide free markets.
  5. Insurance

    Common Life Insurance Questions Answered

    Choosing life insurance can seem daunting at first. Here are answers to commonly asked questions.
  6. Investing

    What's the role of an investment bank?

    Investment banks provide financial advice to businesses and governments and help them raise capital through the sale of stocks, bonds and other products.
  7. Insurance

    IPO Flippers And The Companies Who Hate Them (TWTR, ETSY)

    Learn how flipping activity affects an initial public offering.
  8. Managing Wealth

    Top 6 Performing IPOs of 2015 (ONCE, GBT)

    2015 has produced a mixed year for initial public offerings, with small biotechs overcrowding the winner’s list.
  9. Investing

    Basics Of Federal Bond Issues

    Treasuries are considered the safest investments, but they should still be analyzed when issued.
  10. Insights

    How Investment Banks Make Money

    Take a look at methods through which investment banks make money, such as investment research, asset management, and brokerage and underwriting services.
RELATED FAQS
  1. Do underwriters make guarantees to sell an entire IPO issue?

    Underwriters do not necessarily make guarantees concerning selling an initial public offering (IPO). Read Answer >>
  2. How do I become an underwriter?

    Learn about the education, training and certification required to become an insurance underwriter and the important qualities ... Read Answer >>
  3. 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 >>
  4. How is something "brought over the wall" in an investment bank?

    An analyst who lends his or her expertise to an underwriting department is said to have been "brought over the wall". In ... Read Answer >>
Hot Definitions
  1. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  2. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  3. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
  4. Inventory Turnover

    Inventory turnover is a ratio showing how many times a company has sold and replaces inventory over a period.
  5. Watchlist

    A watchlist is list of securities being monitored for potential trading or investing opportunities.
  6. Hedge Fund

    A hedge fund is an aggressively managed portfolio of investments that uses leveraged, long, short and derivative positions.
Trading Center