Underwriting Agreement

What Is Underwriting Agreement?

An underwriting agreement is a contract between a group of investment bankers who form an underwriting group or syndicate and the issuing corporation of a new securities issue.

Understanding Underwriting Agreement

The purpose of the underwriting agreement is to ensure that all of the players understand their responsibility in the process, thus minimizing potential conflict. The underwriting agreement is also called an underwriting contract.

The underwriting agreement may be considered the contract between a corporation issuing a new securities issue, and the underwriting group that agrees to purchase and resell the issue for a profit.

As mentioned above, the contract is generally between the corporation issuing the new security and investment bankers who form a syndicate. A syndicate is a temporary group of financial professionals formed to handle a large financial transaction that would be difficult to handle individually.

The underwriting agreement contains the details of the transaction, including the underwriting group's commitment to purchase the new securities issue, the agreed-upon price, the initial resale price, and the settlement date.

A best-efforts underwriting agreement is mainly used in the sales of high-risk securities.

Types of Underwriting Agreements

There are several different kinds of underwriting agreements: the firm commitment agreement, the best efforts agreement, the mini-maxi agreement, the all or none agreement, and the standby agreement.