Offering by underwriters: Overview, definition, and example
What is an offering by underwriters?
An offering by underwriters refers to the process through which underwriters—typically financial institutions or investment banks—help a company or entity raise capital by facilitating the sale of securities (stocks, bonds, etc.) to the public or specific investors. In this process, the underwriters act as intermediaries, purchasing the securities from the issuer (the company) and then selling them to investors, usually in an initial public offering (IPO) or a secondary offering.
Underwriters typically guarantee the sale of the securities by committing to buy any unsold securities themselves, or they may act on a "best-efforts" basis, where they make their best effort to sell the securities without guaranteeing the sale of the entire offering. The underwriters also help with setting the price of the securities, marketing the offering, and ensuring compliance with regulatory requirements.
Why is an offering by underwriters important?
An offering by underwriters is important because it allows companies to raise capital by making their securities available to investors. Underwriters play a critical role in helping companies access funding, whether for expansion, acquisitions, or other business needs. They bring expertise in pricing, marketing, and selling securities, ensuring that the offering is successful and that the company can reach its financial goals.
For investors, offerings by underwriters provide access to new investment opportunities. These offerings are typically regulated and involve due diligence, offering transparency and reducing the risk associated with new investments. For underwriters, facilitating offerings is a key business activity that generates fees and commissions while providing financial support to companies in need of capital.
Understanding offering by underwriters through an example
Imagine a company, Company A, decides to go public and offers 1 million shares of stock through an IPO. The company hires an investment bank, Bank B, to act as the underwriter for the offering. Bank B buys the 1 million shares from Company A at an agreed-upon price and then sells them to institutional investors and the public at a higher price.
Bank B guarantees the sale of all 1 million shares, so if any shares are not sold, Bank B will purchase them. This helps Company A raise the full amount of capital it needs, while Bank B earns a commission for facilitating the transaction.
In another example, Company C, a large corporation, wishes to raise more capital by offering additional shares to the public in a secondary offering. The underwriters for this offering, acting similarly to the IPO, assist in pricing, marketing, and selling the shares to new investors.
An example of offering by underwriters clause
Here’s how an offering by underwriters clause might appear in an agreement:
“The Company agrees to issue and sell, and the Underwriters agree to purchase, the Securities pursuant to the terms of this Agreement. The Underwriters shall use their best efforts to sell the Securities to the public at the price specified in the final prospectus. The Underwriters shall also have the option to purchase up to an additional 15% of the Securities at the offering price to cover over-allotments.”
Conclusion
An offering by underwriters is a crucial financial transaction where underwriters help companies raise capital by facilitating the sale of securities to the public or institutional investors. This process provides benefits for both the issuing company and investors, with underwriters acting as intermediaries to ensure the offering is properly executed and successful. The expertise of underwriters in pricing, marketing, and managing regulatory compliance helps both issuers and investors navigate the complexities of capital raising.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.