Hi! On section 3.3 and would love to understand further why an underwriter & issuer would choose firm vs best efforts when raising cap?
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Hi @HannahG - good question! Quick answer - it’s all about liability and money. As is stated in this chapter:
Firm underwriting commitments are riskier for underwriters, therefore their underwriting fees are higher. The underwriter doesn’t want to be stuck with unsold shares, but it’s part of the deal (and why they’re paid more for this type of underwriting). Best efforts underwriting commitments are less risky for underwriters. They won’t be stuck with unsold shares, but they’ll make less money on the underwriting.
Firm underwriting commitments are more risky for the underwriter (they’re stuck with unsold shares or units), but result in more compensation. From the issuer’s perspective, they immediately sell all the shares or units offered to the underwriter, but they’ll pay higher underwriting fees.
Best efforts underwriting commitments are less risky for the underwriter (they are not stuck with unsold shares or units), but result in less compensation. From the issuer’s perspective, they have no guarantee of selling all the shares or units offered to the underwriter (depending on investor demand).
The reasons for choosing one over the other is a preference. Like many other decisions in life, it’s all about balancing risk & return.
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