Reimbursement of underwriters’ expenses: Overview, definition, and example
What is reimbursement of underwriters’ expenses?
Reimbursement of underwriters' expenses refers to a provision in a securities offering agreement where the issuer of the securities agrees to cover certain costs and expenses incurred by the underwriters during the process of offering and distributing the securities. Underwriters are financial institutions or entities that help the issuer raise capital by facilitating the sale of securities (such as stocks or bonds) to investors. These expenses may include legal fees, registration fees, printing costs, marketing and distribution expenses, and other related costs.
This provision ensures that the underwriters are compensated for the costs they incur in connection with the offering, which is typically negotiated as part of the underwriting agreement. It helps to outline which expenses will be covered and provides clarity on the financial arrangements between the issuer and the underwriters.
Why is reimbursement of underwriters' expenses important?
Reimbursement of underwriters’ expenses is important because it ensures that the underwriters are not financially burdened by the costs associated with facilitating the offering. Underwriting a public or private offering can be a complex and expensive process, and this provision guarantees that the underwriters are reimbursed for their reasonable out-of-pocket expenses, thus enabling them to continue their services without absorbing significant financial risk.
For issuers, agreeing to reimburse underwriters’ expenses is a standard practice and can help attract reputable underwriters to the offering. For underwriters, it provides financial protection and encourages them to assist the issuer in achieving a successful capital raise. This arrangement fosters collaboration and reduces potential conflicts over the financial aspects of the offering.
Understanding reimbursement of underwriters’ expenses through an example
Imagine a company is planning to go public and hires an investment bank to serve as the underwriter for its initial public offering (IPO). The underwriter incurs various expenses, including fees for legal counsel, registration with the SEC, and costs for roadshows to market the offering to potential investors. The underwriting agreement includes a provision stating that the company will reimburse the underwriter for these expenses, which amounts to $2 million.
In another example, a company issues bonds through a financial institution acting as an underwriter. The underwriter incurs costs related to preparing offering documents, conducting investor presentations, and handling regulatory filings. The agreement specifies that the company will reimburse these costs, ensuring that the underwriter does not have to bear the financial burden of these expenses.
An example of a reimbursement of underwriters’ expenses clause
Here’s how a reimbursement of underwriters' expenses clause might look in an underwriting agreement:
“The Company agrees to reimburse the Underwriters for all reasonable out-of-pocket expenses incurred in connection with the offering, including but not limited to legal fees, filing fees, and printing costs. Such reimbursement shall not exceed $[Insert Amount] without the prior written consent of the Company. The reimbursement shall be paid within [Insert Number] days after the closing of the offering.”
Conclusion
Reimbursement of underwriters' expenses is a common provision in underwriting agreements that ensures underwriters are compensated for the costs they incur while facilitating the issuance of securities. It is crucial for maintaining a fair and transparent relationship between issuers and underwriters and helps prevent financial conflicts. By agreeing to cover these expenses, issuers ensure that underwriters can focus on raising capital efficiently without being financially burdened by the costs of the 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.