Types of Underwriting Arrangements

Firm Commitment vs. Best-Efforts Offering. A public offering can be executed on either a firm commitment or a best-efforts basis. In a firm commitment offering, the underwriter agrees to buy the whole offering from the firm at a set price and to offer it to the public at a slightly higher price. In this case, the underwriter bears the risk of not selling the issue, and the firm's proceeds are guaranteed. In a best-efforts offering, the underwriter and the firm fix a price and the minimum and maximum number of shares to be sold. The underwriter then makes the "best effort" to sell the issue.

7See Barry, Muscarella, and Vetsuypens (1991). Also, Chapter 3 discusses warrants in more detail.

8Sometimes the term secondary means any non-IPO, even if the shares are primary. To avoid confusion, some investment bankers use the term add-on, meaning primary shares for an already public company.

9The costs associated with initial public offerings of equity will be discussed in detail in Chapter 3.

16 Part I Financial Markets and Financial Instruments

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