Investment Company and Variable Contracts Products Representative (Series 6)Practice Exam

A financial commitment is made in which type of underwriting?

1. Best efforts offer

2. All-or-none offer

3. Firm-commitment offering

4. Private placement

The correct answer is: Firm-commitment offering

In a firm-commitment offering, the underwriter takes on significant financial responsibility by purchasing the entire issue of securities from the issuer and then reselling them to the public. This arrangement means that the underwriter bears the risk of any unsold shares; if they cannot sell all the securities, they must still pay the issuer for the full amount. This is why the financial commitment is strong in this type of underwriting — the underwriter is fully committed to purchasing and reselling the entire offering. This contrasts with the other types of underwriting mentioned. In a best efforts offer, the underwriter agrees to use its best efforts to sell as much of the offering as possible, but does not guarantee the sale of all securities, meaning no firm financial commitment to the issuer. An all-or-none offer requires the entire offering to be sold or it is canceled, which also does not involve a firm financial commitment upfront. In private placements, securities are sold directly to a small number of investors without a public offering, which does not fit into the traditional underwriting framework involving public offerings. Thus, the firm-commitment offering appropriately represents a scenario where a clear financial commitment is made by the underwriter.