Legal Definitions - standby commitment

A standby commitment is a financial agreement, typically made during a public offering of securities, where an investment bank or financial institution (known as the underwriter) guarantees to purchase any shares or other securities that are not bought by the general public. In return for taking on this risk and providing this assurance, the company issuing the securities (the issuer) pays the underwriter a fee. This arrangement provides a safety net for the issuer, ensuring that all their securities are sold and they raise the intended amount of capital, even if public demand is lower than anticipated.

Here are some examples to illustrate how a standby commitment works:

• Scenario: Tech Startup's Initial Public Offering (IPO)
  InnovateTech Inc., a rapidly growing software company, decides to raise $100 million by selling 10 million new shares to the public in an Initial Public Offering (IPO). They partner with Global Capital Bank to manage the offering. InnovateTech is concerned that if market conditions are volatile, not all 10 million shares might be purchased by investors. To mitigate this risk, InnovateTech enters into a standby commitment with Global Capital Bank. Global Capital Bank agrees that if, after the public offering, any shares remain unsold, they will buy those remaining shares themselves. For this guarantee, InnovateTech pays Global Capital Bank a pre-agreed fee, ensuring InnovateTech receives its full $100 million in capital.

  This illustrates how Global Capital Bank acts as the underwriter, providing a financial safety net for InnovateTech (the issuer) by guaranteeing the sale of all shares in its IPO, for which it receives a fee.

• Scenario: Existing Company's Rights Offering
  Legacy Manufacturing Co., an established industrial firm, needs to raise $50 million for a new factory expansion. Instead of a traditional public offering, they decide to issue new shares to their existing shareholders through a "rights offering," giving them the first opportunity to buy new shares at a discounted price. To ensure the full $50 million is raised, Legacy Manufacturing Co. engages Apex Financial Services. They enter into a standby commitment where Apex Financial Services agrees to purchase any new shares that Legacy's existing shareholders do not subscribe to during the rights offering period. Legacy pays Apex a fee for this guarantee, ensuring the factory project is fully funded regardless of shareholder participation.

  This demonstrates how Apex Financial Services, as the underwriter, provides a standby commitment to Legacy Manufacturing Co. (the issuer) to ensure all new shares are sold in a rights offering, thereby securing the necessary capital.

• Scenario: Municipal Bond Issuance for Public Works
  The City of Greenville plans to issue $75 million in municipal bonds to fund the construction of a new public library and community center. To ensure the project can proceed without financial shortfalls, the city wants a guarantee that all bonds will be sold to investors. They work with Community Investment Group. The City of Greenville and Community Investment Group establish a standby commitment. Under this agreement, Community Investment Group promises to buy any municipal bonds that are not purchased by the public during the initial offering period. In exchange for this assurance, the City of Greenville pays Community Investment Group a fee from the bond proceeds.

  This example shows how Community Investment Group acts as the underwriter, providing a standby commitment to the City of Greenville (the issuer) to guarantee the sale of its municipal bonds, ensuring the public works project is fully funded.