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Bought Deal

A bought deal is a type of underwriting agreement where an investment bank or underwriter agrees to purchase an entire new issue of securities from a company before they are offered to the public. The underwriter then resells these securities to investors, taking on the risk of selling the entire issue. Bought deals are often used in equity offerings, particularly when the issuing company wants to raise capital quickly.

Example

A company looking to raise $100 million through a new stock offering might enter into a bought deal with an investment bank, which agrees to purchase all the shares upfront and then sell them to the public.

Key points

• A bought deal involves an underwriter purchasing the entire new issue of securities upfront.

• The underwriter bears the risk of reselling the securities to the public.

• Commonly used for equity offerings to raise capital quickly.

Quick Answers to Curious Questions

It allows the company to raise capital quickly and transfer the risk of selling the securities to the underwriter.

The underwriter risks not being able to sell the securities at the anticipated price, potentially resulting in a financial loss.

In a traditional underwriting agreement, the underwriter agrees to sell the securities on a best-effort basis, whereas in a bought deal, the underwriter buys the entire issue upfront.