Which of these statements best describes a firm commitment offering?

Which of these statements best describes a firm commitment offering?

• A. The issuer retains all unsold shares
• B. The underwriter assumes the risk of any unsold shares
• C. The offering is made without any underwriting
• D. The underwriter provides advice without obligation

Answer: (B)

A firm commitment offering is a type of underwriting arrangement in which the underwriter agrees to buy all the shares from the issuer and then resells those shares to the public. This means that the underwriter assumes the risk for any unsold shares, taking on the responsibility to purchase the entire offering regardless of whether it sells out in the market. If the underwriter cannot sell all the shares, they must bear the loss or handle the unsold shares on their own. In this context, the other statements do not accurately capture the nature of a firm commitment offering. When the issuer retains unsold shares, it suggests a different type of offering where the issuer bears the risk, which is not the case in a firm commitment. An offering made without any underwriting implies that there is no professional intermediary involved to purchase and resell the shares, contradicting the definition of a firm commitment. Lastly, if the underwriter provides advice without obligation, this aligns more with advisory services rather than an underwriting scenario where the underwriter assumes financial responsibility for the sale of the shares.

A firm commitment offering is a type of underwriting arrangement in which the underwriter agrees to buy all the shares from the issuer and then resells those shares to the public. This means that the underwriter assumes the risk for any unsold shares, taking on the responsibility to purchase the entire offering regardless of whether it sells out in the market. If the underwriter cannot sell all the shares, they must bear the loss or handle the unsold shares on their own.

In this context, the other statements do not accurately capture the nature of a firm commitment offering. When the issuer retains unsold shares, it suggests a different type of offering where the issuer bears the risk, which is not the case in a firm commitment. An offering made without any underwriting implies that there is no professional intermediary involved to purchase and resell the shares, contradicting the definition of a firm commitment. Lastly, if the underwriter provides advice without obligation, this aligns more with advisory services rather than an underwriting scenario where the underwriter assumes financial responsibility for the sale of the shares.