Future Business Leaders of America (FBLA) Securities and Investments Practice Test

What type of offering allows underwriters to purchase shares that are not subscribed to in a rights offering?

1. Standby offering

2. Private placement

3. Auction market

4. Best efforts

The correct answer is: Standby offering

A standby offering is a type of rights offering where underwriters agree to purchase any shares that remain unsubscribed after the existing shareholders have had the opportunity to buy additional shares at a discounted price. This arrangement is beneficial because it ensures that the issuing company will be able to raise the necessary funds, as the underwriters take on the risk of buying any leftover shares not taken up by current shareholders. In contrast, a private placement involves selling securities directly to a select group of investors, which does not offer any subscription rights to existing shareholders. An auction market features a system where buyers and sellers compete for securities, rather than a structured rights offering. Lastly, a best efforts arrangement involves underwriters agreeing to sell as much of the offering as possible but do not guarantee the full amount will be sold and do not purchase leftover shares, making it distinct from a standby offering.