Underwriting Agreement Key Terms

When a company decides to go public and offer securities, they may choose to work with an underwriter to help facilitate the process. An underwriter is a financial entity that helps the company issue and sell their securities to the public. In order to formalize this relationship, the company and the underwriter will enter into an underwriting agreement. As a professional, it`s important to understand the key terms involved in an underwriting agreement.

1. Underwriting fee – The underwriting fee refers to the amount of money the underwriter will receive for their services. This fee is typically a percentage of the total amount of securities being offered and can range from 1% to 5%.

2. Public offering price – This is the price at which the securities will be sold to the public. The underwriter will work with the company to set the public offering price based on market demand and other factors.

3. Lock-up period – The lock-up period is a specified amount of time after the securities are issued during which certain shareholders, such as company insiders, are prohibited from selling their shares. This is designed to prevent a sudden influx of shares on the market, which could flood the market and decrease the value of the securities.

4. Greenshoe option – The greenshoe option is a provision in the underwriting agreement that allows the underwriter to purchase additional shares of the securities at the public offering price. This is typically used to help support the price of the securities in the event that demand is higher than expected.

5. Due diligence – Before agreeing to underwrite the securities, the underwriter will conduct due diligence on the company to ensure that they are a sound investment. This may involve reviewing financial records, interviewing key executives, and analyzing industry trends.

6. Representations and warranties – The underwriting agreement will include various representations and warranties made by the company to the underwriter. These may include statements about the company`s financial status, the accuracy of their financial statements, and their compliance with relevant laws and regulations.

7. Termination – Finally, the underwriting agreement will outline the circumstances under which the agreement may be terminated. For example, the agreement may be terminated if the company fails to meet certain financial targets or if there is a material adverse change in their business.

Understanding these key terms is essential for anyone working with underwriting agreements. By keeping these terms in mind, you can ensure that the underwriting process goes smoothly and that all parties involved are able to achieve their desired outcomes.

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