Firm securities: Overview, definition, and example
What are firm securities?
Firm securities refer to financial instruments, such as stocks, bonds, or other tradable assets, that are underwritten or committed to by an investment firm or financial institution. These securities are typically issued as part of an offering where the underwriter guarantees the sale by purchasing them from the issuer and reselling them to investors.
For example, in an initial public offering (IPO), an investment bank may agree to underwrite firm securities by purchasing a fixed number of shares from the issuing company and then selling them in the market.
Why are firm securities important?
Firm securities play a critical role in capital markets by providing companies with guaranteed funding and reducing the risk of unsold securities. When underwriters commit to firm securities, they ensure that issuers receive the capital they need, even if investor demand fluctuates.
For investors, firm securities represent a reliable offering, as they are backed by financial institutions that have assessed the risk and value of the securities before underwriting them. This structure provides greater stability in public and private offerings.
Understanding firm securities through an example
Imagine a company is issuing $100 million in corporate bonds. An investment bank agrees to underwrite the entire amount, meaning it will buy all the bonds from the company and then sell them to investors. Even if demand is lower than expected, the company still receives its full $100 million because the underwriter committed to purchasing the firm securities.
In another example, a startup launches an IPO, offering 5 million shares at $20 each. A financial institution agrees to purchase all 5 million shares and resell them to investors. By underwriting these firm securities, the institution takes on the risk but ensures the startup receives the full proceeds from the IPO.
Example of a firm securities clause
Here’s how a firm securities clause might appear in a contract:
"Underwriter agrees to purchase from the Issuer and offer for resale the Firm Securities in accordance with the terms set forth herein. The Underwriter shall be obligated to acquire all such Firm Securities, irrespective of investor demand, ensuring full subscription of the offering."
Conclusion
Firm securities provide issuers with financial certainty by guaranteeing that all offered securities are sold, while underwriters take on the risk of reselling them. This mechanism ensures smoother capital raising, enhances investor confidence, and stabilizes the securities market.
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.