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Simple English definitions for legal terms
firm-commitment underwriting
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A quick definition of firm-commitment underwriting:
Firm-commitment underwriting is when a company wants to sell stocks to the public, they hire an underwriter who agrees to buy all the stocks and sell them to the public. The underwriter takes on the financial risk of any unsold stocks. This is different from best-efforts underwriting, where the underwriter only tries to sell the stocks but doesn't guarantee to buy any unsold stocks. Another type of underwriting is standby underwriting, where the underwriter agrees to buy any unsold stocks after the public offering for a fee.
A more thorough explanation:
Definition: Firm-commitment underwriting is a type of underwriting where the underwriter agrees to buy all the shares to be issued and remain financially responsible for any securities not purchased.
For example, if a company wants to issue new shares to the public, they may hire an underwriter to help with the process. In a firm-commitment underwriting, the underwriter agrees to buy all the shares from the company and then resell them to the public. This means that the underwriter takes on the risk of not being able to sell all the shares and is financially responsible for any unsold shares.
Another type of underwriting is best-efforts underwriting, where the underwriter agrees to direct the public sale of the securities but does not guarantee the purchase of all the shares.
Firm-commitment underwriting is often used for larger offerings or for companies that may have a higher risk of not being able to sell all their shares. It provides a guaranteed source of funding for the company and reduces their risk in the offering process.