investment banking Investment banking pertains to certain activities of a financial services company or a corporate division that consist in advisory-based financial transactions on behalf of individuals, corporations, and governments. Traditionally associated wit ...

, an underwriting contract"The Investment Banking Handbook" by J. Peter Williamson, 1988,
""Underwriting Contracts", p. 128
/ref> is a contract between an

underwriter Underwriting (UW) services are provided by some large financial institutions, such as banks, insurance companies and investment houses, whereby they guarantee payment in case of damage or financial loss and accept the financial risk for liabilit ...

and an

issuer Issuer is a legal entity that develops, registers, and sells securities for the purpose of financing its operations. Issuers may be governments, corporations, or investment trusts. Issuers are legally responsible for the obligations of the issu ...

securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...

. The following types of underwriting contracts are the most common: * In the ''firm commitment contract,'' the underwriter guarantees the sale of the issued stock at the agreed-upon price. For the issuer, it is the safest but the most expensive type of the contracts, since the underwriter takes the risk of sale. * In the ''best efforts contract,'' the underwriter agrees to sell as many shares as possible at the agreed-upon price. * Under the ''

all-or-none All or none (AON) is a finance term used in investment banking or securities transactions that refers to "an order to buy or sell a stock that must be executed in its entirety, or not executed at all". Partial execution is not acceptable; the order ...

contract'', the underwriter agrees either to sell the entire offering or to cancel the deal. ''Stand-by underwriting'', also known as ''strict underwriting'' or ''old-fashioned underwriting'' is a form of stock

insurance Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to hedge ...

: the issuer contracts the underwriter for the latter to purchase the shares the issuer failed to sell under

stockholder A shareholder (in the United States often referred to as stockholder) of a corporation is an individual or legal entity (such as another corporation, a body politic, a trust or partnership) that is registered by the corporation as the legal owner ...

s' subscription and applications."The Law of Securities Regulation" by Thomas Lee Hazen, 1996, , p. 405.

References

{{Corporate finance and investment banking Initial public offering Contract law Underwriting