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What is an underwriting contract?

Underwriting contract

It’s an agreement between underwriters and a company issuing new shares to the public. The contract contains details of the transaction, including the underwriting group of investment bankers' commitment to buy the new stock, its public offering price and the settlement date.

Where have you heard about underwriting contracts?

The main purpose of an underwriting contract is to set in stone the terms and conditions associated with the underwriting process. It’s insurance that all the parties involved understand their responsibilities so the potential for conflict further down the line will be minimised.

What you need to know about underwriting contracts.

You can get different types of underwriting contract. These are the most common:

  • Firm commitment contract. The underwriter guarantees the sale of the issued stock at the agreed price. For the company issuing the new shares, it’s the safest but most expensive option as the underwriter bears all the risk of the sale

  • Best efforts contract. The underwriter agrees to sell as many shares as it can at the agreed price

  • All-or-none contract. The underwriter agrees either to sell the entire offering or to cancel the deal altogether

Find out more about underwriting contracts.

Read our definitions of syndicate desk and underwriting spread.

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