In a firm commitment underwriting agreement, what responsibility does the underwriter have?

In a firm commitment underwriting agreement, the underwriter assumes the responsibility of purchasing the entire offering of securities from the issuer. This means that the underwriter buys all the shares being offered and then resells them to investors at a predetermined price. This approach transfers the risk of not selling the shares from the issuer to the underwriter because the underwriter guarantees that the issuer will receive the full amount raised through the offering, regardless of whether all the shares are sold to the public.

By committing to purchase the entire offering, the underwriter also plays a crucial role in providing capital to the issuer upfront, which is essential for financing their projects or operations. This arrangement can create a stronger incentive for the underwriter to effectively market and promote the offering to ensure it sells out, but their primary responsibility is the purchase itself.

In contrast, while assisting in pricing decisions, selling shares, or maintaining a secondary market can be roles involved in an underwriting process, they do not encapsulate the primary obligation that defines a firm commitment underwriting. The key characteristic is the underwriter’s assumption of full financial responsibility for the issued securities until they are sold to the public.