Purchase of the securities by the underwriters: Overview, definition, and example
What is the purchase of the securities by the underwriters?
The purchase of securities by the underwriters refers to the process in which financial institutions or investment banks (known as underwriters) buy securities, such as stocks or bonds, from a company that is issuing them, with the intent to resell these securities to investors. This process typically occurs during an initial public offering (IPO) or other types of public or private securities offerings. Underwriters act as intermediaries between the company issuing the securities and the public investors. They buy the securities at a set price and then sell them to investors, usually for a profit.
For example, if a company decides to go public, an underwriter purchases the shares from the company and then offers them to investors through the IPO.
Why is the purchase of the securities by the underwriters important?
The purchase of securities by the underwriters is important because it facilitates the capital-raising process for companies. By buying the securities upfront, underwriters provide the company with the funds it needs while also assuming the risk associated with the sale of those securities. This ensures that the company can access capital, even if there is no immediate demand from the market. For investors, underwriters typically provide a structured and regulated way to access securities, and they help manage the risk associated with new or potentially volatile investments.
For businesses, underwriters are key partners in launching new securities offerings. Their involvement adds credibility, helps determine the market price of the securities, and provides access to a broader investor base.
Understanding purchase of the securities by the underwriters through an example
Imagine a technology startup, InnovateTech, is preparing to go public and issues 1 million shares at $10 each in an IPO. An investment bank, BigInvest, acts as the underwriter and agrees to purchase all 1 million shares from InnovateTech at the offering price of $10 per share. BigInvest then resells the shares to investors in the public market, often at a higher price, say $12 per share, making a profit from the difference. InnovateTech receives $10 million from BigInvest, which it can use for its operations or expansion, while BigInvest assumes the risk of selling the shares to the public.
In another example, a company issues bonds and engages underwriters to buy the bonds at a fixed price and then sell them to institutional investors. The underwriters play a crucial role in managing the distribution and ensuring that the bonds are successfully placed in the market.
An example of a "purchase of the securities by the underwriters" clause
Here’s how a clause like this might appear in an agreement:
“The Underwriters agree to purchase the Securities from the Issuer at the purchase price of $[insert price] per share. The Underwriters shall then offer and sell the Securities to the public at the agreed offering price, subject to applicable law and market conditions.”
Conclusion
The purchase of securities by the underwriters is a critical part of the process for raising capital through public or private offerings. Underwriters buy the securities from the issuer, assume the associated risk, and then resell them to investors, often at a higher price. This mechanism provides companies with the capital they need while ensuring that investors have access to new investment opportunities in a regulated and managed environment. For businesses, engaging underwriters is essential for successfully navigating public offerings and attracting a broad base of investors.
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.