Representations and warranties of the underwriters: Overview, definition, and example
What are representations and warranties of the underwriters?
Representations and warranties of the underwriters refer to the statements and assurances made by the underwriters in a securities offering (such as an IPO or bond issuance). These statements confirm that the underwriters have performed due diligence, have complied with all legal requirements, and have disclosed any material information related to the securities being offered. The underwriters are typically financial institutions or investment banks responsible for selling the securities to investors.
In a typical securities offering agreement, the underwriters may provide representations and warranties to reassure the issuer (the company offering securities) that the offering has been handled properly and in compliance with laws and regulations. If any of these statements are later found to be false, the underwriters may be liable for any resulting damages.
Why are representations and warranties of the underwriters important?
Representations and warranties are important because they help protect the issuer of the securities by ensuring that the underwriters are conducting the offering responsibly and in compliance with applicable laws. These statements also provide assurance to investors that the securities have been properly vetted and that there are no material misstatements or omissions regarding the offering.
For the underwriters, making these representations is a way to confirm their role in conducting proper due diligence and managing the offering in accordance with industry standards. It also helps limit the risk of liability by explicitly confirming certain facts about the offering and the due diligence performed.
Understanding representations and warranties of the underwriters through an example
Imagine a tech company planning to go public through an IPO. The company hires an investment bank as the underwriter to manage the offering. As part of the agreement, the underwriters provide representations and warranties to the company, stating that they have conducted due diligence on the company's financials, business operations, and legal status. The underwriters also confirm that all material information related to the offering has been disclosed in the prospectus and that there are no false statements that could mislead investors.
If, after the IPO, it is discovered that the underwriters failed to disclose a significant financial issue with the company, the underwriters may be held liable for damages based on the breach of their representations and warranties.
An example of a representations and warranties clause of the underwriters
Here’s how a representations and warranties clause of the underwriters might appear in an underwriting agreement:
“The Underwriters represent and warrant that they have conducted due diligence on the Company, including a review of all relevant financial statements, legal filings, and business operations, and that all material information concerning the Company’s financial condition and operations has been disclosed in the Offering Documents. The Underwriters further represent that the Offering complies with applicable securities laws and regulations.”
Conclusion
Representations and warranties of the underwriters are key elements in securities offerings, providing assurances to the issuer and investors that the offering has been conducted in compliance with legal standards. These statements help mitigate risk for both parties and ensure that the offering process is transparent, thorough, and legally sound.
For the underwriters, making accurate and truthful representations is essential to managing liability and maintaining trust in the offering. For issuers, these representations provide confidence that the securities offering is being handled responsibly and in a legally compliant manner.
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.