A best-efforts offering is a term used in finance and investment banking to describe an agreement between an underwriter and an issuing company in which the underwriter commits to making their best effort to sell as many shares as possible from the new issuance, without guaranteeing the sale of all the shares. Unlike a firm commitment offering where the underwriter buys all the shares and resells them to the public, in a best-efforts offering, any unsold shares remain the responsibility of the issuing company.
Types of Best-Efforts Offerings
All-or-None Offering
In an all-or-none (AON) offering, the issuer stipulates that the securities offering must be completely sold for the deal to proceed. If the underwriter fails to sell all of the shares, the offering is called off, and no shares are sold.
Mini-Maxi Offering
Also known as a “part” or “partial” best-efforts offering, a mini-maxi offering sets a minimum threshold of shares that must be sold for the offering to be considered successful. If this minimum is met, the underwriter will continue to sell up to a maximum amount of shares specified.
Special Considerations
Risk
The primary risk associated with best-efforts offerings lies with the issuing company, which may not sell all the intended shares, potentially affecting the amount of capital raised.
Commission
Underwriters typically earn a commission on the shares sold. In a best-efforts offering, this commission can provide incentives for the underwriter to sell as many shares as possible.
Examples
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Initial Public Offering (IPO): Smaller companies that may not be able to attract enough interest for a firm commitment often opt for best-efforts offerings.
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Secondary Offering: Companies that have already gone public might use this method if the market conditions are uncertain, to mitigate their risk.
Historical Context
The concept of best-efforts offerings has been around as long as capital markets themselves. However, their prominence has heightened during periods of economic uncertainty or market volatility, where investors are more risk-averse, making firm commitments less attractive for underwriters.
Related Terms
- Underwriting: Underwriting is the process by which investment banks raise investment capital from investors on behalf of corporations and governments that are issuing securities.
- Firm Commitment Offering: In a firm commitment offering, the underwriter buys all the shares from the issuer and resells them to the public, assuming full financial responsibility for any unsold shares.
- Shelf Registration: A provision under which a company can register a new issue without having to sell the entire issue at once. In this setting, best-efforts offerings can be more flexible and advantageous.
FAQs
Q1: What is the main difference between a best-efforts offering and a firm commitment offering?
A: The main difference lies in the underwriter’s liability. In a best-efforts offering, the underwriter does not guarantee the sale of all shares, nor do they purchase unsold shares. In a firm commitment offering, the underwriter buys all the shares and resells them, assuming any unsold shares’ financial risk.
Q2: Why might a company choose a best-efforts offering over a firm commitment offering?
A: Companies might choose a best-efforts offering when the risk of unsold shares is high, and they prefer to avoid the higher underwriting fees associated with a firm commitment. It is also favorable during uncertain market conditions.
Q3: How does an all-or-none offering work within the best-efforts framework?
A: In an all-or-none best-efforts offering, the deal proceeds only if all the shares are sold. If the underwriter fails to sell the total number of shares, the offering is canceled, and investors are refunded.
References
- Fabozzi, Frank J., and Pamela Peterson Drake. “Finance: Capital Markets, Financial Management, and Investment Management.” Wiley, 2020.
- Hull, John C. “Options, Futures, and Other Derivatives.” Pearson, 2014.
- Mishkin, Frederic S. “The Economics of Money, Banking, and Financial Markets.” Pearson, 2019.
Summary
A best-efforts offering allows the underwriter to sell the issuer’s shares on a non-guaranteed basis, enabling smaller or more risk-averse companies to access capital markets. While this offers flexibility and shared risk, it also presents the challenge of potentially raising less capital than targeted. Understanding the nuances of best-efforts offerings helps companies and investors make informed decisions aligned with market conditions and risk tolerance.
