Types of Underwriting Commitments
To sell shares to the public, the company must first engage an investment bank, also called an underwriter. The underwriter will help the company register the securities, but perhaps more importantly, it will help to market and sell the securities to the public. In most cases, it will also assume the risk of any unsold securities. The underwriter will typically be chosen by its reputation. It may be a large investment bank that has underwritten many public offerings in the past, or it may be a “boutique” investment bank that specializes in a particular industry.
If the issuer chooses the underwriter and negotiates the terms of the contract with only this underwriter, it is called a negotiated offering. Negotiated offerings are the most common type of corporate underwritings. In contrast, when an issuer solicits bids for the offering and chooses an underwriter based on the lowest cost to the issuer, it is called a competitive offering. This type of offering is common for municipal security offerings but rare for corporate offerings.
Once an underwriter has been chosen, the issuer and underwriter will enter into an agreement that defines who will bear most of the responsibility