9.19 : Types of Underwriting: Best Efforts

Best Efforts underwriting is a financial arrangement in which an underwriter markets a securities offering without guaranteeing the sale of the entire issue. This method is frequently used when the market outlook for security is uncertain, or the issuing company has limited financial history, making the offering riskier for potential investors. Unlike other underwriting agreements, the underwriter in this scenario acts solely as an intermediary, using their expertise and connections to sell as much of the offering as possible.

A defining feature of Best Efforts underwriting is its emphasis on minimizing risk for the underwriter. They are not required to purchase unsold securities, which shifts the responsibility for unmet funding to the issuer. While this protects the underwriter from financial losses, it introduces variability in the funds the issuing company raises, as the final amount depends on market demand.

This method is particularly suitable for smaller or newer companies struggling to secure a Firm Commitment underwriting. It enables them to access public capital markets while keeping underwriter costs lower. However, it also means the issuer must prepare for the possibility of receiving less funding than anticipated, depending on market conditions and investor interest.