What kind of offerings involve acting in a "principal" capacity?

What kind of offerings involve acting in a "principal" capacity?

• A. Best efforts
• B. Firm commitments
• C. Private placements
• D. All or none offerings

Answer: (B)

In the context of securities offerings, acting in a "principal" capacity generally refers to situations where an underwriter or dealer buys the securities from the issuer and then sells them to investors, effectively taking on the risk of holding the securities. This is characteristic of firm commitment offerings. In a firm commitment, the underwriter guarantees the issuer that they will raise a certain amount of money by purchasing the entire issue of securities and reselling them. If they cannot sell all the securities, they are still obligated to pay the issuer the agreed-upon amount, thus taking on financial risk. In contrast, in other types of offerings, such as best efforts, the underwriter does not guarantee the sale of all shares; instead, they make their best effort to sell as many as possible while returning any unsold portions to the issuer. In private placements, securities are sold directly to a small number of investors without a public offering, and typically, the firm does not act in a principal capacity. All or none offerings require all securities to be sold or none at all, but this does not inherently imply a principal capacity either. Therefore, firm commitments distinctly involve acting in a principal capacity due to the financial responsibilities taken on by the underwriter.

In the context of securities offerings, acting in a "principal" capacity generally refers to situations where an underwriter or dealer buys the securities from the issuer and then sells them to investors, effectively taking on the risk of holding the securities. This is characteristic of firm commitment offerings. In a firm commitment, the underwriter guarantees the issuer that they will raise a certain amount of money by purchasing the entire issue of securities and reselling them. If they cannot sell all the securities, they are still obligated to pay the issuer the agreed-upon amount, thus taking on financial risk.

In contrast, in other types of offerings, such as best efforts, the underwriter does not guarantee the sale of all shares; instead, they make their best effort to sell as many as possible while returning any unsold portions to the issuer. In private placements, securities are sold directly to a small number of investors without a public offering, and typically, the firm does not act in a principal capacity. All or none offerings require all securities to be sold or none at all, but this does not inherently imply a principal capacity either. Therefore, firm commitments distinctly involve acting in a principal capacity due to the financial responsibilities taken on by the underwriter.