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

What type of underwriting is cancelled if the entire issue is not sold?

1. Best-efforts

2. Firm commitment

3. All-or-None

4. Stand-by

The correct answer is: All-or-None

The correct answer, "All-or-None," refers to a type of underwriting agreement where the underwriter commits to sell the entire issue of securities. If the underwriter is unable to sell all of the securities in the offer, the entire underwriting is canceled, and no securities are sold. This type of arrangement protects the issuer from receiving partial funding and ensures that the full amount of capital is raised. In contrast, a best-efforts underwriting does not guarantee that the full issue will be sold, as the underwriter only sells as many securities as possible but does not commit to purchasing any unsold portion. Similarly, in a firm commitment underwriting, the underwriter buys the entire issue and assumes the risk of selling it to the public, meaning the issuer gets the funds even if some securities remain unsold. Finally, the stand-by underwriting pertains to a situation where an underwriter agrees to purchase any unsold portion of a new issue, providing additional security for the issuer but not canceling the agreement if the entire issue is not sold. Understanding the distinctions between these types of underwriting helps clarify why "All-or-None" is the correct choice in this context.