Legal Definitions - standby commitment

A standby commitment is an agreement between an underwriter and an issuer of securities. The underwriter agrees to buy any unsold shares remaining after the public offering for a fee. This agreement is also known as a standby underwriting agreement.

ABC Company is planning to issue 1 million shares of stock to the public. They hire XYZ Underwriters to help with the offering. XYZ Underwriters agree to a standby commitment, which means they will buy any unsold shares after the public offering for a fee. If only 900,000 shares are sold, XYZ Underwriters will buy the remaining 100,000 shares.

Another example could be a bond offering. If a company is issuing bonds and is unsure if they will sell all of them, they may enter into a standby commitment with an underwriter. The underwriter will agree to buy any unsold bonds after the public offering for a fee.

These examples illustrate how a standby commitment works. It provides a safety net for the issuer of securities, ensuring that they will be able to sell all of their securities and raise the necessary funds. The underwriter takes on the risk of buying any unsold securities, but they are compensated for this risk with a fee.