A best efforts offering is sometimes used in connection with a ______ of new, long-term securities.
- private placement
- privileged subscription
- public issue
- all of the above
Answer: c. public issue
Answer Explanation
A best efforts offering is sometimes used in connection with a public issuance of long-term securities. This type of underwriting means that the investment bank or underwriter does not guarantee the sale of the entire securities issue.
As a result, the underwriter does its “best” to sell the securities to investors, but no firm commitment is made to purchase any unsold securities. Initial public offerings (IPOs) and follow-on public offerings are common methods for issuing new, long-term securities.
Securities are offered to the general public in a public offering, which allows a large number of investors to participate. In addition to pricing and distributing the securities to potential buyers, the underwriter acts as a conduit between the company issuing and the investors. In a best efforts offering, the underwriter takes on the role of a sales agent. The underwriter earns a commission for its efforts, but it doesn’t bear the risk of unsold securities.
Why the other options are not correct
a. Private placement
Securities are sold directly to institutional investors or accredited individuals in a private placement, which is a type of offering. A private placement is not a public offering, and the securities are not available to the general public. Instead, a limited number of qualified investors are offered the securities.
Typically, best efforts offerings are not used in private placements since the investor pool is small and prequalified, making it unnecessary for the underwriter to make “best efforts” to sell the securities.
b. Privileged subscription:
An offering in which existing shareholders are given the right to purchase additional shares before the stock is offered to the general public is known as a privilege subscription, or rights offering. Existing shareholders are the only ones eligible to subscribe to these new shares. They have the privilege to do so proportionally to their existing holdings.
Because the rights offering is limited to existing shareholders. The underwriter does not need to make “best efforts” to sell the securities to a broader investor base in the context of privileged subscription.
d. All of the above:
Option (d) is incorrect because a best efforts offering is not applied to all of the options mentioned (private placement, privileged subscription, and public offering). The primary purpose of it is to issue new, long-term securities to the public.
Conclusion
The best efforts offering can sometimes be used to publicize new, long-term securities. In a public issue, securities are offered to the general public. The underwriter makes its “best efforts” to sell the securities to investors without guaranteeing the sale of the entire issue.
In addition, (a) Private placement, (b) Privileged subscription, and (d) All of the above are incorrect because best efforts offerings are not commonly used in those contexts. As part of the capital-raising process, companies and investors must understand the different types of offerings and underwriting methods.
I am Bibisha Shiwakoti a final year BBS student from Janapremi College. I have completed my higher secondary education at Kalinchowk Secondary School.
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