Explain Underwriting Agreement
When a company decides to issue securities, such as stocks or bonds, it may need the assistance of an underwriter to help sell the securities to investors. This is where an underwriting agreement comes into play.
An underwriting agreement is a contract between the company that is issuing the securities and the underwriter, which is usually a financial institution such as a bank or investment firm. The underwriter agrees to purchase the securities from the company and then resell them to investors.
The underwriting agreement outlines the terms and conditions of the agreement, including the size and price of the securities, the commission the underwriter will receive, and any other obligations or restrictions on the underwriter’s ability to sell the securities.
One key aspect of the underwriting agreement is the “lock-up” period, which is a period of time after the securities are sold when the underwriter is prohibited from selling any of the shares they purchased. This helps prevent a flood of shares hitting the market all at once, which could lead to a significant drop in the price of the securities.
The underwriting agreement also typically includes a provision for the underwriter to provide a “roadshow” for the company, which involves traveling to various cities to pitch the securities to potential investors. This can be a critical aspect of the underwriting process, as it allows the company to get the word out about the securities and generate interest from investors.
Overall, an underwriting agreement is an important tool for companies looking to raise capital through the sale of securities. By working with an underwriter, companies can take advantage of the expertise and connections of financial institutions to reach investors and achieve their fundraising goals.