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

What type of underwriting leaves the syndicate at no risk for unsold shares?

1. All or none

2. Best efforts

3. Firm commitment

4. Mini-max

The correct answer is: Best efforts

The best efforts underwriting arrangement is designed in such a way that the syndicate acts on behalf of the issuing company but does not assume the risk of unsold shares. In this scenario, the underwriting firm agrees to sell as many shares as possible at the agreed-upon offering price, but if it cannot sell all the shares, the remaining unsold shares are returned to the issuer. This means that the syndicate does not bear the risk of being left with unsold inventory, making it an attractive option for companies that may not have the market demand for all shares to be sold. In contrast, other types of underwriting carry different implications for risk. For instance, in a firm commitment arrangement, the underwriter purchases the entire issue of shares from the issuer and takes on the full risk of unsold shares. All or none underwriting is similar, as it requires the entire offering to be sold for the transaction to go through; otherwise, the offering is canceled. Mini-max underwriting sets a minimum and a maximum threshold for the number of shares sold, but also involves some risk in terms of the investment and commitment from the underwriter. Thus, the key feature of best efforts underwriting is that it allows the syndicate to operate without the risk of unsold shares