Underwriting Commitments
The arrangements by which investment banks bring new issues to market: in a firm-commitment underwriting the bank buys the entire issue and resells it (acting as principal); in a best-efforts deal it sells what it can as agent, with no purchase obligation.
The exam loves the “who eats the unsold shares” question. The tell is a scenario where an issue is undersubscribed: in a firm commitment the underwriter is acting as principal, so it owns the leftover inventory; in best efforts it acts as agent, so the issuer is simply left with unsold securities. A common trap pairs firm commitment with the wrong capacity — remember underwriter-as-principal means it bought the shares first. Expect questions distinguishing the best-efforts variants: in all-or-none and mini-max, investor funds sit in escrow until the contingency is met, and are returned if it fails.
Don’t confuse the commitment (the underwriter’s risk arrangement) with the primary-market transaction itself, where the issuer receives the proceeds, or with the prospectus that must accompany the sale — those are separate testable layers. Also keep standby (backstops a rights offering) distinct from a Reg D private placement, which skips public underwriting and registration entirely. Hook: firm = the firm is on the hook.
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