Series 27: Anti-Fraud Rules For Best Efforts Underwritings

Anti-Fraud Rules for Best Efforts Underwritings

If an issuer of new securities is a smaller, less well-known company, it may engage in a best efforts commitment with its underwriter. In this kind of agreement, the underwriter agrees to use its best efforts to sell the issuer’s securities, but the underwriter does not guarantee that all the shares will be sold. Nor is the underwriter financially responsible for the securities it doesn’t sell. The underwriter is allotted a certain period of time to sell the issue, usually between 30 and 90 days. If a certain portion of the issue has not been sold by the end of the subscription period, the offering will be cancelled and the securities returned to the issuer. Investors will be given back their investment.

There are two types of best efforts commitments.

• • In an all-or-none (AON) commitment, the underwriter sells all the shares in the offering or the offering is voided. More specifically, the underwriter must receive the offering by a certain date and sell it within a specified period of time. Otherwise, the entire offering will be returned.
• • In a mini-max commitment, the underwriter commits to sell a minimum number of shares of the offering or the offering will be cancelled. The underwriter is expected only to use his best efforts to sell the remainder. A mini-max is sometimes called a part-or-none commitment.

Either of these best efforts commitments may have a market out clause, where the underwriter is permitted to cancel the agreement without penalty for certain specified reasons, such as an unexpected downturn in the mark