What is a firm commitment underwriting?

Firm Commitment: In a firm commitment underwriting, the underwriter guarantees to purchase all the securities offered for sale by the issuer regardless of whether they can sell them to investors. It is the most desirable agreement because it guarantees all of the issuer's money right away.

Should a securities offering be done on a firm commitment basis?

The more in demand the offering is, the more likely it will be done on a firm commitment basis. In a firm commitment, the underwriter puts its own money at risk if it can’t sell the securities to investors. Underwriting a securities offering on a firm commitment basis exposes the underwriter to substantial risk.

Is a firm commitment agreement too expensive?

A firm commitment arrangement will likely be too costly for such companies. While firm commitment and best efforts agreements are the most common types of underwriting deals, there are other alternatives as well. These include:

Why is a firm commitment a good option?

It is the most desirable agreement because it guarantees all of the issuer's money right away. The more in demand the offering is, the more likely it will be done on a firm commitment basis. In a firm commitment, the underwriter puts its own money at risk if it can’t sell the securities to investors.