Firm commitment and best efforts are the two basic underwriting arrangements. In a firm-commitment offering, underwriters purchase the entire issue from the issuer and resell it to investors — bearing the risk of unsold securities. In a best-efforts offering, the selling firms merely agree to try: they sell what they can as agents, and the issuer bears the risk of a shortfall.
Why the distinction matters in alternatives
Traditional IPOs and bond deals are firm-commitment underwritings — the syndicate’s capital commitment is why the underwriting discount exists and why deals price to sell. Non-traded products are best-efforts offerings: the dealer manager and selling group place shares continuously without ever owning them, earning selling commissions and fees as agents. The consequences are structural. Fundraising is uncertain and gradual — a non-traded REIT raises what the channel sells, month by month, which is why minimum-offering escrow provisions exist (proceeds held until a threshold is met, historically protecting early investors from stranded micro-raises) and why capital-raise velocity is a competitive metric. No underwriter capital means no underwriter price discipline: the offering price in a best-efforts deal is set by the issuer (at NAV in modern products), not negotiated by a syndicate risking its own money. And distribution incentives sit closer to the surface — compensation flows per share sold, the economics FINRA Rule 2310 caps and Reg BI scrutinizes.
Related terms
Dealer Manager · Underwriting Discount · Selling Commission · Initial Public Offering (IPO) · Continuous Offering
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