Firm Commitment – Best Effort Offerings:

The purpose of this post is to provide the reader with a general understanding of what the difference is between a firm commitment and a best efforts offering of securities to the public. This information is being provided for educational purposes only and is not designed to be complete in all material respects. Thus, it should not be relied upon as providing legal or investment advice. If you have any questions concerning this post, you should contact a qualified professional.

A firm commitment is an agreement between and investment banker and an issuer of securities to be offered to the public. The underwriters, as the investment bankers are called in this situation, make their profit on the difference between the purchase price – determined through either competitive bidding or negotiation – and the public offering price. A firm commitment underwriting is distinguished from a conditional arrangement for distribution of new securities, such as a best efforts or standby commitment. The word underwriting is frequently misused with respect to these conditional arrangements.

A best efforts offering is an agreement between an investment banker and an issuer by which the investment banker, acting as the agent for the issuer, agrees to do its best to sell the issue to the public. For the shares that it sells, the investment banker gets paid a predetermined commission.

Depending on the terms of the best efforts 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 forgo the fee.

This post does not relate to how securities are distributed in private placements. Private placements will, in the body of the offering document, explain the distribution method being used.