Standby Volume Underwriting Agreement: An Overview
A standby volume underwriting agreement (SVUA) is a type of agreement between a company and an underwriter, which helps a company raise funds by issuing securities. The underwriter agrees to purchase the securities from the company at a fixed price, and then resell them to the public.
The primary objective of a standby volume underwriting agreement is to provide security to a company during times of financial uncertainty. In cases where traditional means of financing are unavailable or inadequate, companies may turn to standby underwriting agreements to issue securities and obtain funding from investors.
How Does a Standby Volume Underwriting Agreement Work?
The terms of an SVUA are negotiated between the company and the underwriter. The company sets the terms of the securities they wish to issue, such as the type of securities and the price at which they wish to offer them. The underwriter agrees to purchase the securities at a predetermined price and assumes the risk of being unable to sell them at the same price.
The underwriter then resells the securities to investors at a markup, which generates revenue for the underwriter. The amount of the markup, or the underwriter`s commission, is negotiated between the company and the underwriter.
When a company enters into an SVUA, it is obligated to issue and sell the securities to the underwriter. In turn, the underwriter is obligated to purchase all of the securities offered by the company, even if they cannot resell them to investors. This provides a measure of certainty to the company, as they are guaranteed to raise the funding they require, even if they cannot find investors for their securities.
Why Use a Standby Volume Underwriting Agreement?
There are several reasons why a company may choose to use an SVUA. One of the most compelling reasons is to provide certainty during times of financial uncertainty. By having a guaranteed buyer for their securities, companies can raise the funds they need to operate, even in challenging financial markets.
Additionally, an SVUA can provide a faster, more efficient way for companies to raise funds compared to other financing options. For example, an initial public offering (IPO) can be a time-consuming and expensive process, and the outcome is uncertain. In contrast, an SVUA can be completed relatively quickly, allowing companies to raise funds when they need them.
Finally, an SVUA can be an effective way for companies to build relationships with underwriters. By working with an underwriter on an SVUA, a company can develop a relationship that may lead to other financing opportunities in the future.
In summary, a standby volume underwriting agreement is a type of agreement between a company and an underwriter that allows companies to issue securities and raise funds from investors. These agreements provide certainty to companies during times of financial uncertainty and can be a faster, more efficient way to raise funds compared to other financing options. By understanding the benefits of an SVUA, companies can make informed decisions on how to obtain the funding they need to succeed.