Understanding Standby Underwriting: What It Means for Investors and Issuers
Definition & meaning
Standby underwriting is a financial arrangement where an investment bank or underwriter commits to purchase any remaining shares of a new securities issue that are not sold during a public offering. This process typically occurs when a company provides its existing shareholders the option to buy additional shares. If the shareholders do not take up this offer, the underwriter steps in to ensure the company raises the intended capital. While this arrangement secures funding for the issuer, it also carries the risk for underwriters, as they may have to buy shares that could lose value. Underwriters typically charge a standby fee for this service.
Legal use & context
Standby underwriting is primarily used in the context of corporate finance and securities law. It is relevant in situations involving public offerings and capital raising efforts. Legal practitioners may encounter this term when advising companies on financing strategies or when drafting agreements related to securities offerings. Users can manage some aspects of this process using legal templates available through platforms like US Legal Forms, which provide resources for creating necessary documents.
Real-world examples
Here are a couple of examples of abatement:
Example 1: A technology company plans to issue one million shares to raise capital for expansion. They offer existing shareholders the first opportunity to purchase these shares. If only 700,000 shares are sold, the investment bank will purchase the remaining 300,000 shares to ensure the company receives the full amount of capital it aimed for.
Example 2: A pharmaceutical company is launching a new drug and needs funds for research. They offer additional shares to current investors, but if the response is lukewarm, the standby underwriter will buy the leftover shares to meet the funding goal. (hypothetical example)