When a company decides to go public and issue stocks, it will need to enter into an underwriting agreement with an investment bank or a group of investment banks. This agreement is a contract that outlines the terms and conditions of the public offering of the company`s stocks.
The underwriting agreement is an important document that protects both the issuing company and the underwriting investment bank. It is a legally binding agreement that sets forth the rights and obligations of both parties involved in the public offering. It also includes important information about the offering, such as the number of shares to be offered, the offering price, and the underwriting commission.
There are two types of underwriting agreements: firm commitment and best efforts. A firm commitment underwriting agreement means that the investment bank agrees to purchase all of the shares at an agreed-upon price and then resell them to the public. If the investment bank is unable to sell all the shares, it bears the risk of holding the unsold shares. A best-efforts underwriting agreement means that the investment bank agrees to use its best efforts to sell the shares but is not obligated to purchase any unsold shares.
The underwriting agreement also includes a lock-up period, which is a period of time during which the company`s insiders, such as executives and directors, are prohibited from selling their shares. The lock-up period is typically 180 days but can be longer or shorter depending on the agreement.
Another important aspect of the underwriting agreement is the indemnification clause, which protects the investment bank from any legal or financial repercussions that may arise from the public offering. The issuing company agrees to indemnify the investment bank against any lawsuits, damages, or losses resulting from the offering.
In summary, the underwriting agreement is a crucial document in the process of going public. It sets forth the terms and conditions of the public offering and protects both the issuing company and the investment bank. Understanding the underwriting agreement is essential for anyone involved in the process of issuing stocks.