Reimbursement of initial purchasers’ expenses: Overview, definition, and example
What is reimbursement of initial purchasers' expenses?
Reimbursement of initial purchasers' expenses refers to the process in which the issuer of a security (such as stocks or bonds) agrees to pay back certain costs incurred by the initial purchasers or underwriters of those securities. These expenses can include fees related to legal services, marketing, underwriting, due diligence, and other costs associated with the offering of the securities. Typically, this arrangement is detailed in the underwriting or purchase agreement, ensuring that the initial purchasers or underwriters are compensated for the resources and expenses they spent on the transaction.
For example, in a public offering, an investment bank that serves as the initial purchaser may incur significant legal, accounting, and administrative costs. The issuer may agree to reimburse these expenses as part of the agreement.
Why is reimbursement of initial purchasers' expenses important?
Reimbursement of initial purchasers' expenses is important because it helps ensure that the financial institutions or entities involved in facilitating the sale of securities are compensated for the resources they invest in the process. This reimbursement also makes it easier for the underwriters or purchasers to engage in these transactions without worrying about the upfront costs, which can be significant.
For issuers, reimbursing the expenses of initial purchasers helps build strong relationships with underwriters, allowing for more favorable terms during future offerings. For investors, it ensures that the transaction costs are covered by the issuer rather than by the underwriters themselves, allowing for a smoother offering process.
Understanding reimbursement of initial purchasers' expenses through an example
Imagine a company planning to issue $50 million in bonds through an underwriter. The underwriter spends $1 million on due diligence, legal fees, and other costs to prepare the offering. As part of the underwriting agreement, the company agrees to reimburse these expenses.
If the bonds are successfully sold, the issuer will reimburse the underwriter for the $1 million in expenses, ensuring that the underwriter is not out of pocket for the costs incurred while helping to facilitate the offering.
In another case, during an initial public offering (IPO), the investment bank handling the IPO may have to pay for legal work, roadshow expenses, and marketing campaigns. The issuer may agree to reimburse the investment bank for these costs, ensuring the bank does not absorb these expenses and can focus on managing the offering.
An example of a reimbursement of initial purchasers' expenses clause
Here’s how a reimbursement of initial purchasers' expenses clause might appear in an underwriting agreement:
“The Issuer agrees to reimburse the Initial Purchasers for their reasonable out-of-pocket expenses incurred in connection with the offering, including but not limited to legal fees, accounting fees, marketing expenses, and due diligence costs. Such reimbursement shall not exceed $[amount].”
Conclusion
Reimbursement of initial purchasers' expenses is a common practice in securities offerings that ensures the underwriters or purchasers are compensated for the costs incurred in facilitating the transaction. This arrangement benefits both the issuer and the underwriters, creating a clear and fair framework for managing transaction-related expenses.
For businesses involved in issuing securities, understanding how to manage these reimbursements effectively is crucial to maintaining strong relationships with underwriters and ensuring that the offering process proceeds smoothly.
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.