Best Efforts Offering

Best efforts offering is a term frequently used in the world of IPOs and businesses going public. A best efforts offering is when an investment bank or broker-dealer agrees to do its best to sell the company security offering to the public, but does not buy the securities outright or guarantee that the issuing company will receive any amount. This is one of several different types of underwritings used by investment banks.

When an investment bank is hired to underwrite securities of a company, there are other types of offerings, including the most common, firm commitment. With a firm commitment offering, the investment bank guarantees the number of securities it will sell and guarantees its commitment by purchasing the shares themselves, even if they cannot sell them. The shares that the investment bank is unable to sell cannot be returned to the company. Whether an investment bank uses best efforts or firm commitment is decided between the company and investment banker beforehand. Best efforts offerings are best for the investment bank because they are not held liable for the securities they are unable to sell. That is why firm commitment offerings are so popular with companies going public because their shares will get sold no matter what, even if it is the investment bank that is buying them.

Taking a company public via IPO is a great way for companies to raise capital for continued operations and expansion, but there are thousands of other ways for businesses to get the financing they need.


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