Definition of Underwriting Agreement

An underwriting agreement is a legally binding contract between an issuer of securities and an underwriter, who is typically a financial institution or investment bank. The agreement outlines the terms and conditions under which the underwriter will purchase and resell the issuer`s securities to the public.

In simpler terms, an underwriting agreement is a guarantee that the underwriter will buy all of the securities that the issuer is offering to sell, regardless of whether or not they can find buyers for them all. The underwriter then resells these securities to investors at a profit.

Underwriting agreements are commonly used in initial public offerings (IPOs), which is when a company first offers its stock for sale to the public. The underwriter helps the company determine the price of the stock, prepares and files all of the necessary registration documents with the Securities and Exchange Commission (SEC), and then buys the stock from the company at the agreed-upon price.

Once the underwriter has purchased the stock, they will then work to sell it to investors. This can involve marketing the stock to potential buyers, setting up roadshows or meetings with investors, and other promotional efforts. Ideally, the underwriter will be able to sell all of the stock they purchased from the issuer, making a profit in the process.

Underwriting agreements typically include a number of important provisions, such as the amount of stock being offered, the price of the stock, the underwriter`s commission, and any conditions or restrictions on the underwriter`s resale of the stock. These agreements are also subject to various state and federal securities laws and regulations, which can add additional requirements or restrictions.

For companies looking to go public, an underwriting agreement can be an essential tool for ensuring a successful offering. By partnering with an experienced underwriter, a company can tap into the underwriter`s expertise and resources, increasing the chances of a successful IPO. Underwriting agreements can also provide reassurance to investors that the stock being offered is being sold through a reputable and established financial institution, which can help to boost investor confidence in the offering.