Series 79 practice questionmediumUnderwriting Agreements
A small company is conducting a $10 million IPO under a best efforts underwriting arrangement. The underwriter sells only $6 million worth of shares after the offering period. What happens to the unsold $4 million in shares?
- AThe unsold shares are returned to the company and the offering proceeds with the $6 million in shares sold✓ Correct answer
- BThe underwriter must purchase the remaining $4 million
- CThe entire offering is canceled and all money is returned to investors
- DThe SEC requires the underwriter to extend the offering period
Explanation
Why A — The unsold shares are returned to the company and the offering proceeds with the $6 million in shares sold
In a best efforts underwriting, the underwriter acts as an agent and agrees only to use its best efforts to sell the securities. There is no guarantee that all shares will be sold, and the underwriter has no obligation to purchase unsold shares. Unless the arrangement includes an all-or-none or minimum contingency, the offering proceeds with whatever amount was sold. The issuer receives proceeds only for shares actually sold, and unsold shares remain with the company.
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