Question

A. Describe the differences in the underwriting process for an Investment Bank between a firm commitment securities offering and a best efforts offering.

B. What are the risks assumed by the Investment Company and those assumed by the Client for each of these two types of offerings.

(I want you to type the anwer)

Answer 1

Firm Commitment: Arrangement whereby and investment bank enters into a written agreement, with the issuer of the securities, to make an outright purchase from the issuer of securities to be offered to the public. The underwriter, as the investment banker, is required to make its profit on the difference between the purchase price determined through either competitive budding or negotiation and the public offering price. Generally firm commitment underwriting is only done for higher qualify companies or where the investment bank as obtained indications of interest which reflect that it will be able to resell the shares that it is purchasing from the issuer.

Best Efforts: Investment bankers, acting as agents, agree to do their best to sell an issue to the public. Instead of buying the securities outright, agents buy an authority to sell the securities. Depending on the contract, the agents exercise their option and buy enough shares to cover their sales to clients, or they cancel the incompletely sold issue altogether and fore go the fee. Best efforts deals entail risks and delays from the issuer's standpoint.

Best efforts is subject to risks and delays from the issuer's standpoint, Best efforts offerings are commonly open longer than firm-commitment offerings, allowing more time for potential negative news or events to occur that would make the offering seem overpriced exacerbates these risks.

The investment banker has greater risk with the firm commitment underwriting, since the investment banker will absorb any adverse price movements in the security before the entire issue is sold.