What is meant by a "best efforts" underwriting agreement?

A "best efforts" underwriting agreement refers to a situation where the underwriter commits to selling as much of the securities being offered as possible, but without guaranteeing the sale of the entire issue. In this type of agreement, the underwriter acts as an agent for the issuer, working to find buyers for the securities while taking on less risk than in a "firm commitment" underwriting, where the underwriter purchases the entire offering and resells it to the public.

In a best efforts scenario, the underwriter does not have an obligation to buy any unsold portions of the securities. Instead, they exert their best efforts to sell the securities to the public and only receive a commission or fee based on the sales they successfully complete. This approach is typically utilized for smaller offerings or when the issuer is uncertain about the market demand for their securities, allowing them to reduce their financial risk if demand falls short.

Understanding this type of agreement is crucial for both issuers and investors, as it impacts the level of risk involved in the underwriting process and the overall dynamics of the capital-raising effort.