Underwriting Law and Legal Definition
Underwriting is an agreement used in the sale of new issues of corporate securities. In underwriting, the underwriter will guarantee a certain price for a certain number of securities to the party that is issuing the security. Thus, the issuer is secure that they will raise a certain minimum from the issue, while the underwriter bears the risk of the issue for a fee.
Once the underwriting agreement is struck, the underwriter bears the risk of being able to sell the underlying securities, and the cost of holding them on its books until such time in the future that they may be favorably sold.
It is generally done by investment bankers who may form an underwriting group or underwriting syndicate of investment banks or brokers to share in the underwriting risk. By underwriting securities, investment bankers raise investment capital from investors on behalf of corporations and governments that are issuing securities.
Underwriting is also the process of signing at the end of an insurance policy to assume liability if the specified damage or loss actually occurs.