University of Central Florida (UCF) FIN3403 Business Finance Practice Exam 1

A best efforts basis agreement indicates that the underwriter commits to using their best efforts to sell a specified number of securities in an offering but does not take on the obligation to buy any unsold shares. Under this arrangement, the underwriter will attempt to sell the securities and will return any unsold portions to the issuer. This is particularly beneficial for issuers who want to minimize risk, as they are not obligated to take on unsold securities. The revenue generated from the securities sold will be kept by the issuer, while the underwriter earns a commission based on the sales made.

This contrasts with agreements where the underwriter might be required to buy all the securities, regardless of the sales made (as would be the case in a firm commitment underwriting), hence reducing the financial risk to the issuer. Understanding this concept is crucial for anyone involved in financing or investment, as it lays the foundation for the responsibilities and risks associated with different underwriting arrangements.