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Underwriting Contract

An underwriting contract is a legal agreement between an issuing company and an underwriter (usually an investment bank) in which the underwriter agrees to purchase and sell the company’s securities, such as stocks or bonds. The contract outlines the terms and conditions of the underwriting, including the fees, the price at which the securities will be offered, and the obligations of both parties. There are different types of underwriting contracts, including firm commitment, best efforts, and standby agreements.

Example

In a firm commitment underwriting contract, the underwriter agrees to purchase all the securities from the issuing company, assuming full responsibility for selling them to investors, even if they cannot sell all the shares.

Key points

• A legal agreement between an issuer and an underwriter for the sale of securities.

• Specifies the terms, pricing, and obligations of both parties.

• Can take different forms, such as firm commitment, best efforts, or standby underwriting.

Quick Answers to Curious Questions

The most common types are firm commitment, best efforts, and standby contracts, each with different levels of risk for the underwriter.

The underwriter agrees to buy the securities from the issuer and sell them to investors, with specific terms and pricing outlined in the contract.

In a firm commitment, the underwriter guarantees the purchase of all the securities, while in a best efforts contract, the underwriter agrees to sell as much as possible without guaranteeing the sale of all securities.