Firm Commitment Underwriting Law and Legal Definition
Firm commitment undertaking is an underwriting in which an underwriter buys an entire issue at a fixed price from the issuing company with the hope of reselling the securities at a slightly higher price to the public.
In a firm commitment undertaking, the underwriter guarantees the sale of the issued stock at the agreed-upon price. Underwriter will be responsible for any unsold portion of the issue. This transfers the risk of the unsold portion of the issue from the issuer to the underwriters. For the issuer, it is the safest but the most expensive type of the contracts, since the underwriter takes the risk of sale.
The underwriters make their profit on the difference between the purchase price- determined through either competitive bidding or negotiation and the public offering price. It is also known as firm commitment offering.