In investment banking, an underwriting contract is a contract between an underwriter and an issuer of securities.
The following types of underwriting contracts are most common:
- In the firm commitment contractthe underwriter guarantees the sale of the issued stock at the agreed-upon price. For the issuer, it is the safest but the most expensive type of the contracts, since the underwriter takes the risk of sale.
- In the best efforts contractthe underwriter agrees to sell as many shares as possible at the agreed-upon price.
- Under the all-or-none contractthe underwriter agrees either to sell the entire offering or to cancel the deal.
Stand-by underwriting, also known as strict underwriting or old-fashioned underwriting is a form of stock insurance: the issuer contracts the underwriter for the latter to purchase the shares the issuer failed to sell under stockholders’ subscription and applications.
- ^ Jump up to:ab c d “The Investment Banking Handbook” by J. Peter Williamson, 1988, ISBN 0-471-81562-4 , “”Underwriting Contracts”, p. 128
- ^“The Law of Securities Regulation” by Thomas Lee Hazen, 1996, ISBN 0-314-08587-4, p. 405.