Legal Definitions - standby underwriting

Definition: Standby underwriting is a type of underwriting where the underwriter agrees to buy any unsold shares from the issuer after a public offering, for a fee.

Underwriting is the act of assuming a risk by insuring it or agreeing to buy all or part of a new issue of securities to be offered for public sale. There are three types of underwriting:

• Best-efforts underwriting: Underwriting in which an investment banker agrees to direct, but not guarantee, the public sale of the issuer's securities.
• Firm-commitment underwriting: Underwriting in which the underwriter agrees to buy all the shares to be issued and remain financially responsible for any securities not purchased.
• Standby underwriting: Underwriting in which the underwriter agrees, for a fee, to buy from the issuer any unsold shares remaining after the public offering.

For example, if a company wants to issue 100,000 shares of stock to the public, they may hire an underwriter to help with the sale. If the underwriter is doing a standby underwriting, they will agree to buy any shares that are not sold to the public. So, if only 80,000 shares are sold, the underwriter will buy the remaining 20,000 shares from the company.

This type of underwriting provides a safety net for the issuer, as they are guaranteed to sell all of their shares, even if the public is not interested in buying them. However, it also comes at a cost, as the underwriter charges a fee for this service.