Investment Company and Variable Contracts Products Representative (Series 6)Practice Exam

A ___________ underwriting is used for shares not purchased through a rights offering.

1. Stabilization

2. Best-efforts

3. Mini-max

4. Firm commitment

The correct answer is: Stabilization

The correct answer to the question is a firm commitment underwriting. In this type of underwriting, an underwriter agrees to purchase all the shares being offered by the issuer and resell them to the public. This arrangement provides the issuer with a guarantee of capital, as the underwriter assumes the financial risk of purchasing the shares, regardless of whether they can sell them to investors. A firm commitment underwriting is typically used in initial public offerings (IPOs) or primary offerings, where shares are being newly issued and sold directly to investors. This structure ensures that the issuer receives the total proceeds from the share sale, as the underwriter takes on the obligation to buy the shares outright. On the other hand, stabilization refers to efforts made to maintain the price of securities in the market after the initial offering has been completed, while best-efforts underwriting involves the underwriter agreeing to sell as much of the offering as possible but does not guarantee the total amount will be sold. A mini-max underwriting allows for the sale of a minimum and maximum number of shares, ensuring that the issuer achieves a certain level of proceeds but does not relate specifically to shares issued outside a rights offering.