Increase in underwriters’ commitments: Overview, definition, and example
What is an increase in underwriters’ commitments?
An increase in underwriters’ commitments refers to a situation where the underwriters involved in a securities offering (such as an initial public offering or a bond issuance) agree to increase the amount of securities they will purchase or guarantee to sell. Underwriters are financial institutions or investment banks that assist in the issuance of securities by buying them from the issuer and reselling them to the public. In some cases, the underwriters may decide to increase their commitments if there is strong demand for the securities, or if the issuer requires additional funds. The increase in commitments can occur before the offering is finalized or during a "greenshoe" option, which allows underwriters to purchase additional shares if there is high demand.
Why is an increase in underwriters’ commitments important?
An increase in underwriters’ commitments is important because it can provide the issuer with additional capital or ensure the success of the offering by meeting higher-than-expected demand. It also signals confidence in the offering’s potential, as underwriters are willing to take on more risk by committing to purchase or sell more securities. For the issuer, this increase can result in a larger capital raise, which may be necessary for funding expansion, acquisitions, or other strategic goals. For investors, the increase in commitments can ensure that more shares or bonds are available for purchase, potentially enhancing liquidity and offering more investment opportunities.
Understanding increase in underwriters’ commitments through an example
For example, a company is launching an initial public offering (IPO) and the underwriters initially agree to purchase and distribute 5 million shares. However, during the roadshow, demand for the IPO exceeds expectations, and the underwriters decide to exercise the greenshoe option, increasing their commitments to 6 million shares. This increase ensures that the issuer can raise additional capital and meet investor demand, while also providing liquidity to the market by offering more shares for purchase.
In another example, a company issues bonds with an initial underwriting commitment of $50 million. As the offering proceeds, it becomes clear that there is significant investor interest, so the underwriters decide to increase their commitment to $75 million. This increase allows the issuer to raise more funds than initially planned, which could be used to finance a major expansion project.
An example of an increase in underwriters’ commitments clause
Here’s how an increase in underwriters’ commitments clause might appear in a securities offering agreement:
“The Underwriters have agreed, subject to the conditions set forth in this Agreement, to increase their commitments in the offering by up to an additional [X]% of the total number of securities being offered. This increase may be exercised at the discretion of the Underwriters in the event of excess demand, and the terms of such increase will be consistent with the provisions of the greenshoe option.”
Conclusion
An increase in underwriters’ commitments is an important mechanism in securities offerings that helps issuers raise additional capital and ensures that the offering meets investor demand. It reflects the confidence of the underwriters in the offering’s success and helps manage the risks associated with the securities issuance. Whether through a greenshoe option or through additional voluntary commitments, this provision plays a key role in the flexibility and success of the offering.
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.