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

In what type of underwriting does the underwriter agree to buy the entire issue of securities?

1. Best-efforts underwriting

2. Firm commitment underwriting

3. All-or-None underwriting

4. Stand-by underwriting

The correct answer is: Firm commitment underwriting

Firm commitment underwriting is the correct answer because in this type of arrangement, the underwriter fully commits to purchasing all the securities being offered in the issue. This means that the underwriter takes on the entire risk of selling those securities to investors. If the underwriter cannot sell all of the shares to the public, they must still purchase the unsold portion themselves. This provides the issuer with certainty regarding the total amount of funds they will receive from the sale of their securities, as the underwriter guarantees the price and quantity. In contrast, best-efforts underwriting involves the underwriter agreeing to sell as much of the issue as possible but does not guarantee the sale of the entire issue. All-or-none underwriting requires that either all of the offered securities must be sold, or none at all; this means that if the underwriter cannot sell every security, the offering is canceled. Stand-by underwriting generally refers to a situation where the underwriter agrees to purchase any unsold shares from a rights offering, acting as a backup to ensure the issuer raises the desired funds. Thus, the definitive nature of firm commitment underwriting, where the underwriter assumes the full obligation to purchase the entire issue, is what makes it the correct choice in this context.