Conditions of underwriters’ obligations: Overview, definition, and example
What are conditions of underwriters’ obligations?
Conditions of underwriters’ obligations refer to the specific requirements or events that must be fulfilled or occur before underwriters are obligated to proceed with a securities offering. These conditions typically include due diligence reviews, regulatory compliance, the accuracy of disclosures, and the absence of material adverse changes in the issuer’s financial or operational status.
For example, in an initial public offering (IPO), underwriters might require that all necessary approvals from the Securities and Exchange Commission (SEC) are obtained and that the issuer’s financial statements are certified by independent auditors.
Why are conditions of underwriters’ obligations important?
These conditions are important because they protect underwriters from unnecessary risks by ensuring that all legal, financial, and operational criteria are met before proceeding with a securities offering. For issuers, meeting these conditions demonstrates preparedness and compliance, which builds trust with investors and regulators.
Clear and detailed conditions in underwriting agreements help both parties understand their roles and reduce the likelihood of disputes, delays, or liability.
Understanding conditions of underwriters’ obligations through an example
Imagine a company planning to issue public shares hires an underwriter. The underwriting agreement specifies that the underwriter’s obligation to sell the shares is contingent on the company receiving SEC approval and providing an updated prospectus free from material misstatements. If the company fails to meet these conditions, the underwriter can withdraw from the agreement.
In another example, a bond offering requires that the issuer deliver a legal opinion from counsel confirming the enforceability of the bonds. Until this opinion is delivered, the underwriter is not obligated to proceed with the offering.
An example of a conditions of underwriters’ obligations clause
Here’s how a conditions of underwriters’ obligations clause might look in an underwriting agreement:
“The obligations of the Underwriters to purchase and distribute the Securities are subject to the fulfillment, to the satisfaction of the Underwriters, of the following conditions: (i) the Issuer’s Registration Statement shall have been declared effective by the Securities and Exchange Commission; (ii) no material adverse change shall have occurred in the Issuer’s financial condition or operations; (iii) the Issuer shall deliver an opinion of counsel confirming the validity and enforceability of the Securities; and (iv) the Underwriters shall receive satisfactory certificates from the Issuer’s officers confirming the accuracy of all representations and warranties.”
Conclusion
Conditions of underwriters’ obligations protect both the issuer and underwriter by ensuring that all necessary requirements are met before proceeding with a securities offering. They minimize risk, promote transparency, and help maintain investor confidence.
By including clear and detailed conditions in underwriting agreements, businesses and underwriters can align expectations, mitigate potential liabilities, and ensure a smooth and compliant offering process.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.