What is the difference between best efforts and underwriting?

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What is the difference between best efforts and underwriting?

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What is the difference between best efforts and underwriting?

Explanation & AnswerSolution by a verified expert

Explanation

Best effort basis is an agreement between an investment bank and the firm where the bank agrees to make best efforts to sell the securities of the firm but does not take guarantee of raising a specified amount of money from those securities. However, underwriting is an agreement where a banker buys the securities from the firm and guarantees to raise a specified amount from those securities, even if the public does not subscribe to all the shares, the bank purchases the rest and makes payment to the company.
 
Under best effort basis, risk lies with the firm whereas, in case of underwriting, risk is transferred to the investment bank.

Verified Answer

Best effort basis is an agreement where the underwriter promises to make best efforts in selling the securities of the company but does not promise to raise an amount from those securities whereas under underwriting, the underwriter promises to sell the securities of the company and raise a specified amount.

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