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

What type of underwriting is cancelled if a specified portion is not sold?

1. Stand-by

2. Best-efforts

3. Mini-max

4. Firm commitment

The correct answer is: Mini-max

The correct choice is mini-max underwriting because it involves a stipulation that a certain minimum amount of the offering must be sold for the underwriting agreement to be valid. If that minimum amount is not sold, the underwriting is cancelled. This mechanism serves to protect the issuer by ensuring that they do not end up in a position where they are committed to an offering that does not meet their financial objectives. In contrast, stand-by underwriting involves a commitment from underwriters to buy any unsold shares after the public offering and does not depend on achieving a specific sales threshold; thus, it remains intact even if some shares are left unsold. Best-efforts underwriting allows underwriters to sell as much as they can but has no minimum requirement, meaning the offering can proceed regardless of how much is sold. Firm commitment is an arrangement where underwriters agree to purchase all of the offered shares upfront, with no conditions related to a minimum sale requirement—hence, it cannot be cancelled based on sales performance. This context clarifies that mini-max underwriting is uniquely defined by the requirement for a specified portion to be sold.