Legal Definitions - standby underwriting

Standby underwriting is a financial arrangement where an investment bank or a group of banks (known as the underwriter) agrees to purchase any unsold securities from a new issuance, particularly after an initial offering period to existing shareholders or bondholders. This commitment guarantees that the company or entity issuing the securities will successfully raise the full amount of capital it intends, even if the initial offering is not fully subscribed by its target audience. The underwriter essentially "stands by" to buy the remaining securities, ensuring the offering's success and providing a crucial safety net for the issuer.

• Example 1: Rights Offering for a Public Company

  Imagine "InnovateTech Inc.," a publicly traded software company, decides to raise $100 million for a new research and development project. Instead of a general public offering, they opt for a rights offering, giving their existing shareholders the first opportunity to buy new shares at a discounted price. To ensure they raise the full $100 million, InnovateTech engages "Global Capital Partners" as a standby underwriter. Global Capital Partners agrees to purchase any shares that InnovateTech's existing shareholders do not buy during the rights offering period. If, for instance, shareholders only subscribe for $80 million worth of shares, Global Capital Partners is obligated to buy the remaining $20 million worth, guaranteeing InnovateTech receives its target capital.

• Example 2: Bond Issuance for a Municipality

  The city of "Greenville" plans to issue $50 million in municipal bonds to fund improvements to its public transportation system. They decide to offer these bonds first to local residents and existing bondholders to encourage community investment. To ensure the city secures the full $50 million needed for the project, they enter into a standby underwriting agreement with "Regional Bank & Trust." Regional Bank & Trust commits to purchasing any bonds that are not bought by the local residents and existing bondholders during the initial offering period. This arrangement provides Greenville with the certainty that its transportation project will be fully funded, regardless of the initial public uptake.

• Example 3: Private Placement with a Backstop

  "BioPharma Solutions," a private biotechnology company, is seeking to raise $25 million from its current institutional investors to fund clinical trials for a new drug. While they expect strong interest, they want to guarantee the full amount. They arrange a standby underwriting agreement with "VentureGuard Financial." VentureGuard Financial agrees that if the existing institutional investors do not fully subscribe to the $25 million offering, VentureGuard will step in and purchase the remaining shares. This provides BioPharma Solutions with a crucial safety net, ensuring they have the necessary funds to proceed with their critical drug development without delay.