Listen to a Business English Dialogue About Firm commitment
Brooklyn: Hi Jack, have you ever heard of a firm commitment in the context of finance?
Jack: Hey Brooklyn! Yes, a firm commitment is when an underwriter agrees to buy all the shares of a public offering at a predetermined price and then resell them to the public.
Brooklyn: That’s correct, Jack. It’s a common practice in initial public offerings (IPOs) where the underwriter guarantees to purchase all the shares from the issuer, ensuring that the offering will be fully subscribed.
Jack: Exactly, Brooklyn. This guarantees the issuer that they will receive the funds they need from the offering, even if the market conditions are not favorable at the time of the IPO.
Brooklyn: Right, Jack. And in return for this guarantee, the underwriter receives a fee and assumes the risk of reselling the shares to the public.
Jack: Yes, Brooklyn. The underwriter takes on the risk of any unsold shares, but in exchange, they have the opportunity to profit if they can sell the shares at a higher price than the one they paid to the issuer.
Brooklyn: That’s true, Jack. Firm commitment underwritings provide certainty to the issuer and help facilitate the process of bringing new securities to the market.
Jack: Absolutely, Brooklyn. And they also provide liquidity to the market by ensuring that there is a ready supply of shares available for investors to purchase.
Brooklyn: Yes, Jack. Overall, firm commitments play a crucial role in the capital-raising process, benefiting both issuers and investors alike.
Jack: Indeed, Brooklyn. It’s an important mechanism that helps companies raise capital and grow their businesses while providing investment opportunities to the public.
