What is an Underwriting Agreement?

Underwriting agreements are contractual documents that involve specific covenants between an underwriting group and a corporation that is choosing to issue new securities. Generally, an agent is designated to define the terms of the agreement, along with an authorized representative of the corporation. The underwriting agreement is sometimes referred to as a purchase contract or placing agreement.

The main purpose of an underwriting agreement is to clarify all the terms and conditions associated with the underwriting process related to these new securities. To that end, both the corporation and the underwriter will make specific commitments regarding the stock issue. Within the text of the agreement, the rights and responsibilities of both parties will be expressly detailed, so there is no chance of any misunderstanding between the two entities.

While some details of an underwriting agreement will vary based on factors as the type of stock issued, the country of origin, and any current applicable laws that govern the issue of corporate stock, there are a few elements that will be found in any contract of this type. An underwriting agreement will routinely define the business structure and purpose of both entities that are entering into the agreement. After establishing the identities of the participants, the agreement will go on to define the terms each party will recognize and abide.

There are five other key points that will be addressed and defined within the body of the underwriting agreement. First, the underwriter will covenant to purchase the stock issue. Second, the public offering price of the stock will be set. Next, the terms will address the agreed upon underwriting spread. Fourth, the agreement will specify the settlement date. Last, the net proceeds that are to be realized by the issuer will be defined.

In some cases, the underwriting agreement will take on a form that is referred to as a best efforts agreement. Essentially, this is a modified form of the underwriting agreement that indicates that the underwriter will make a best effort to place the securities in accordance with the expressed wishes of the corporation.