SIE practice questionmediumBest Efforts Underwriting
In a best efforts underwriting, which party bears the risk of unsold securities?
- AThe issuer✓ Correct answer
- BThe investors who purchased shares
- CThe SEC
- DThe underwriter
Explanation
Why A — The issuer
In a best efforts underwriting, the underwriter acts as an agent and agrees only to use its best efforts to sell the securities. Any unsold shares are returned to the issuer, which bears the risk. This contrasts with a firm commitment underwriting, where the underwriter purchases the entire issue and bears the risk of unsold shares. Best efforts underwriting is more common for smaller, riskier, or unproven issuers.
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