Understanding Firm Commitment Underwriting: Key Concepts Explained

Q: How does the underwriter make a profit?

The underwriter profits from the difference between the purchase price and the public offering price.

Q: Is firm commitment underwriting suitable for all companies?

While it can be used by various companies, it is often more suited for those with established financial histories.

Definition & Meaning

Firm commitment underwriting is a financial arrangement where an underwriter purchases an entire issue of securities from a company at a predetermined price. The underwriter then aims to resell these securities to the public at a higher price. This process guarantees that the issuing company receives the agreed-upon funds, transferring the risk of unsold securities to the underwriter. While this type of underwriting offers safety for the issuer, it is also one of the more expensive options available due to the risks undertaken by the underwriter.

Table of content

Legal Use & context

Firm commitment underwriting is primarily used in the context of securities law and finance. It plays a crucial role in initial public offerings (IPOs) and other capital-raising activities. This term is relevant in various legal practices, including corporate law and securities regulation. Individuals or companies considering this type of underwriting can benefit from legal templates and forms available through resources like US Legal Forms, which provide guidance on the necessary documentation and procedures.

Key legal elements

Real-world examples

Here are a couple of examples of abatement:

Example 1: A technology company plans to go public and engages an underwriter to sell one million shares at $10 each. The underwriter purchases all shares upfront, guaranteeing the company $10 million. If the underwriter sells the shares for $12 each, they make a profit on the resale.

Example 2: A manufacturing firm issues bonds through a firm commitment underwriting. The underwriter buys the bonds at a fixed rate and sells them to investors, ensuring the company receives the funds immediately. (hypothetical example)

Comparison with related terms

Term	Definition	Key Differences
Best Efforts Underwriting	The underwriter agrees to sell as much of the issue as possible but does not guarantee the sale of the entire issue.	In best efforts underwriting, the issuer bears more risk compared to firm commitment underwriting.
Private Placement	Sale of securities to a select group of investors rather than the general public.	Private placements do not involve public offerings and typically have different regulatory requirements.

Common misunderstandings

What to do if this term applies to you

If you are a company considering firm commitment underwriting, it is essential to consult with financial advisors and legal professionals to understand the implications and prepare the necessary documentation. Utilizing legal templates from US Legal Forms can help streamline this process. If your situation is complex, seeking professional legal assistance is recommended to ensure compliance with all regulations.

Find the legal form that fits your case

Browse our library of 85,000+ state-specific legal templates.

This field is required

Quick facts

Typical fees: Varies by underwriter and deal size.
Jurisdiction: Governed by state and federal securities laws.
Possible penalties for non-compliance: Fines and legal action from regulatory bodies.