What defines a firm commitment in underwriting?

A firm commitment in underwriting is characterized by the underwriter's complete guarantee to purchase and resell the issued securities. This means that when a company wants to go public or issue new securities, the underwriter agrees to buy the entire issue of securities from the issuer (the company) and then resell them to the public. This creates a level of certainty for the issuer, as they receive capital upfront regardless of whether the underwriter can sell all the securities to investors.

The commitment is termed "firm" because the underwriter assumes the financial risk of holding the securities if they are unable to sell them all. This is contrasted with other types of underwriting arrangements where the underwriter may not guarantee such a level of purchase or could act merely as a facilitator in the sale of the securities without taking on financial risk. In a firm commitment, the underwriter is actively ensuring that the funding goals of the issuing company are met, which can be critical for the success of an initial public offering (IPO) or other securities issuance.