Underwritten Public Offering
Underwriting public offerings refers to the purchase of stocks or bonds of unlisted companies by underwriters or underwriting syndicates, who are responsible for selling them to investors. In underwriting public offerings, underwriters or underwriting syndicates usually sign underwriting agreements with the issuing company, specifying the purchase and sale price and quantity. After purchasing stocks or bonds, underwriters or underwriting syndicates will sell them to investors through a series of sales activities to help the company raise funds and promote the listing and trading of stocks or bonds. Underwriting public offerings usually require approval from securities regulatory authorities and may involve certain risks and costs.
Firm Commitment Offering
Definition
A firm commitment offering is a type of public offering where the underwriter or underwriting syndicate purchases the securities (stocks or bonds) of a company that is not yet publicly traded and is responsible for selling them to investors. In this model, the underwriter assumes all the sales risk, meaning if they cannot sell all the securities, they will bear the unsold portion themselves.
Origin
The firm commitment offering originated in the late 19th and early 20th centuries in the U.S. financial markets when companies needed to raise capital by issuing stocks or bonds. To ensure the success of the issuance, companies would sign firm commitment agreements with underwriters, who would purchase all the issued securities and be responsible for their sale.
Categories and Characteristics
Firm commitment offerings can be divided into two categories: full commitment and partial commitment. Full commitment means the underwriter agrees to purchase all the issued securities, while partial commitment means the underwriter only agrees to purchase a portion, with the remaining part sold by the issuing company. Characteristics of firm commitment offerings include:
- Risk Transfer: The issuing company transfers the sales risk to the underwriter.
- Higher Fees: Due to the higher risk assumed by the underwriter, the fees for firm commitment offerings are usually higher.
- Market Confidence: Firm commitment agreements can enhance market confidence in the issuance.
Specific Cases
Case 1: A tech company plans to raise funds through a public stock offering. The company signs a full commitment agreement with a major investment bank, which purchases all the issued stocks and sells them to investors through its sales network. Ultimately, the company successfully raises the needed funds, and the stock is listed smoothly.
Case 2: A real estate company plans to issue bonds to raise funds for a new project. The company signs a partial commitment agreement with an underwriting syndicate, which purchases 70% of the bonds, with the remaining 30% sold by the company itself. Despite a poor market environment, the bond issuance is successful due to the involvement of the underwriting syndicate.
Common Questions
1. What are the risks of a firm commitment offering?
Answer: The main risk is insufficient market demand, leading the underwriter to bear the unsold portion of the securities.
2. Why are the fees for firm commitment offerings higher?
Answer: Because the underwriter assumes a higher sales risk, they need to charge higher fees to compensate for potential losses.
