firmcommitment

Firm commitment is a form of underwriting used in primary market offerings in which an underwriter guarantees the issuer a fixed amount of capital by agreeing to purchase the entire issue for resale to investors. In this arrangement the underwriter buys the securities from the issuer at an agreed price and then sells them to the public, bearing the risk of any market shortfall or adverse pricing.

The underwriter's obligation creates certainty for the issuer, who receives the proceeds upfront and avoids the risk of unsold securities. If demand is weaker than expected, the underwriter may incur losses, while strong demand can yield gains for the underwriter. The issuer’s net proceeds are determined after fees and the underwriting spread, which compensates the underwriter for its risk and services.

Typically used for both equity and debt offerings, firm commitments involve a due diligence process, a pricing decision, a marketing period, and a closing where funds are delivered to the issuer and securities are delivered to investors. The agreement outlines conditions for closing and potential adjustments to the deal if market conditions change.

Compared with a best efforts arrangement, where the underwriter acts as an agent and is not obligated to purchase the entire issue, firm commitment transfers price and market risk from issuer to underwriter. This structure provides financing certainty for issuers, but introduces greater risk for the underwriter and potential liability for misstatements in the offering documents, governed by applicable securities laws and the underwriting agreement.