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10 Questions

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Underwriter Compensation in IPOs

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Questions and Answers

What happens in a best efforts contract if all the shares being issued cannot be sold within a specific period of time?

The underwriter takes on the risk of unsold shares

The underwriter buys the remaining unsold shares

The offering is withdrawn completely (correct)

The offering is extended indefinitely

What is the usual timeframe for selling minimum numbers of shares in best efforts contracts?

Varies depending on the company size

Over 180 days

Around 90 days (correct)

Less than 30 days

What type of contracts are commonly used by smaller issuers for IPOs?

Auction contracts

Best efforts contracts (correct)

Hybrid contracts

Firm commitment contracts

Which type of contract is usually employed for IPOs raising more than $10 million?

Firm commitment contracts Signup and view all the answers

Why do best efforts contracts, on average, yield higher transaction fees than firm commitment deals?

Achievement of economies of scale with larger issues Signup and view all the answers

In a fixed price offering IPO, how is the share price determined?

Decided in advance by underwriters and the issuing firm Signup and view all the answers

What happens to the share price in a book-building process for an IPO?

Not yet decided upon, indicative range provided to investors Signup and view all the answers

What characteristic defines a best efforts contract as 'all or nothing'?

'All or nothing' withdrawal if all shares can't be sold Signup and view all the answers

What is a key factor contributing to higher transaction fees with best efforts contracts compared to firm commitment deals?

Economies of scale achieved with larger issues Signup and view all the answers

What pricing approach is taken in firm commitment contracts for IPOs?

Pricing set in advance by underwriters irrespective of market conditions Signup and view all the answers