Underwriting

There is no certainty that investors will buy the shares and thus that the Company will get its money to make its acquisition or refinance. This may be because market conditions change or even because investors disagree with management on the outlook for the Company.

Underwriting is an agreement whereby the underwriter promises to subscribe to a specified number of shares, debentures, or a specified amount of stock in the event of the public not subscribing to the issue. If the issue is fully subscribed, then there is no liability for the underwriter. However, if some share issues remain unsold, the underwriter will buy the shares. Thus underwriting is a guarantee for the marketability of shares.

As so much is invested in the strategy behind the share issue, it is regular practice (but not universal) for issues to be’ underwritten.’ An underwriter undertakes to act as the ‘buyer of last resort in return for a fee. This ensures that the Company receives the money it sets out to raise. However, underwriting carries risk for the underwriter, so the terms of the underwriting agreement are often onerous for the Company.