Legal Definitions - underwriting agreement

An underwriting agreement is a formal, legally binding contract between a company or government entity that wishes to issue new securities (such as stocks or bonds) and one or more investment banks, known as underwriters. In this agreement, the underwriters commit to purchasing the securities from the issuer at a specific price and then reselling them to the public or institutional investors. This arrangement is crucial for helping the issuer raise capital, as it guarantees the sale of the securities, while the underwriters take on the financial risk associated with distributing them to the market. The agreement meticulously outlines all the terms of the offering, including the price, the quantity of securities, the responsibilities of each party, and the compensation for the underwriters.

Here are a few examples to illustrate how an underwriting agreement works in different contexts:

• Initial Public Offering (IPO) for a Tech Startup:

  Imagine a rapidly growing software company, "InnovateTech," decides to go public to raise capital for expansion. InnovateTech enters into an underwriting agreement with a major investment bank. Under this agreement, the investment bank commits to buying all of InnovateTech's newly issued shares at a predetermined price. The bank then takes on the responsibility of selling these shares to individual and institutional investors on the stock market. This agreement guarantees InnovateTech receives the necessary funds, while the investment bank manages the complex process of introducing the company's shares to the public market.

• Corporate Bond Issuance for a Manufacturing Company:

  A large automobile manufacturer, "Global Motors," needs to raise a significant amount of money to build a new electric vehicle factory. Instead of issuing more stock, they decide to issue corporate bonds. Global Motors signs an underwriting agreement with a syndicate of several investment banks. These banks agree to purchase all the newly issued bonds from Global Motors at a set interest rate and price. The banks then distribute these bonds to various investors, such as pension funds, insurance companies, and wealthy individuals. This agreement ensures Global Motors secures the capital needed for its factory, with the underwriters facilitating the sale of the debt securities to a wide range of buyers.

• Municipal Bond Issuance for a City Infrastructure Project:

  The City of "Riverbend" plans to construct a new public transportation system and needs to raise funds by issuing municipal bonds. The city government enters into an underwriting agreement with a group of financial institutions. In this contract, the institutions agree to buy all the municipal bonds issued by Riverbend at a specified price and yield. They then market and sell these bonds to investors who are interested in tax-exempt income. This agreement guarantees that the City of Riverbend receives the funds required to finance its critical infrastructure project, relying on the underwriters to connect them with the investment community.