Underwriting is the process of assessing and evaluating risks and providing financial support or guarantee in the form of underwriting contracts. Underwriting contracts are agreements that outline the terms and conditions of the underwriting of securities or insurance policies.
There are different types of underwriting contracts, each with its unique features and requirements. In this article, we will discuss the various types of underwriting contracts.
1. Firm Underwriting:
In this type of underwriting contract, the underwriter or the underwriting syndicate agrees to purchase and take full ownership of the securities being underwritten. The underwriter then resells the securities to the public, usually at a higher price, to make a profit. In firm underwriting, the issuer of the securities is guaranteed to receive the full proceeds of the offering.
2. Best Efforts Underwriting:
In this type of underwriting contract, the underwriter agrees to use its best efforts to sell the securities to the public at the agreed-upon price. The underwriter does not take full ownership of the securities but only acts as an agent for the issuer. The issuer bears the risk of not selling all the securities in a best efforts underwriting.
3. Bought Deal Underwriting:
A bought deal underwriting is a type of firm underwriting in which the underwriter agrees to purchase the entire offering from the issuer, at a discounted price. The underwriter then resells the securities to the public at the market price or a higher price to make a profit.
4. All-or-none Underwriting:
In an all-or-none underwriting, the issuer sets a minimum number of securities that must be sold for the offering to proceed. If the underwriter fails to sell the minimum number of securities, the offering is canceled, and the underwriter returns all funds received from investors.
5. Standby Underwriting:
A standby underwriting contract is an agreement in which the underwriter agrees to purchase any unsold securities in an offering. The standby underwriter acts as a backup plan for the issuer to ensure that the offering is fully subscribed.
In conclusion, underwriting contracts are essential for issuers of securities or insurance policies to manage the risks involved in their offerings. The different types of underwriting contracts offer different levels of protection and risk for issuers and underwriters. Understanding the types of underwriting contracts can help issuers and investors make informed decisions about their investments.