BEST EFFORTS UNDERWRITING Meaning and
Definition
-
Best efforts underwriting is a term commonly used in finance and investment banking to describe a type of underwriting agreement where the underwriter commits to making its best efforts to sell the securities being offered to the public. In this context, underwriting refers to the process of guaranteeing a certain level of capital for a company or government entity, usually through the issuance of stocks or bonds.
Under a best efforts underwriting agreement, the underwriter does not assume full responsibility for the sale of the securities. Instead, they undertake to use their best efforts to sell as many securities as possible. The underwriter may negotiate the terms of the offering, market the securities to potential investors, and provide support during the selling process. However, there is no guarantee that all securities will be sold, and the underwriter does not bear financial liability if the entire offering is not purchased.
This type of underwriting agreement is often used for securities offerings that are considered more risky or where market demand is uncertain. It allows companies to raise capital while minimizing their financial risk. Best efforts underwriting can also provide flexibility as the underwriter is not obliged to purchase any unsold securities, which means they are not left holding large positions in case of limited investor appetite.
Overall, best efforts underwriting offers a lower level of commitment from the underwriter, but still ensures that their best efforts are made to sell the securities being offered.
