What is the difference between a firm commitment and a best-efforts offering?

In a firm commitment underwriting, the underwriters agree to purchase the entire offering of securities from the issuer, thereby guaranteeing that the capital raised will be received by the issuer. This means that regardless of whether the underwriters can sell all the securities to investors, the issuer still gets the proceeds from the sale, making it a secure option for them.

In contrast, a best-efforts offering does not provide this level of assurance. The underwriters in a best-efforts arrangement do not guarantee the sale of any specified amount of securities. Instead, they agree to make their best effort to sell as much of the offering as possible, but if they are unable to sell all of it, they do not take on that risk and the issuer may end up receiving less than they hoped for.

This distinction is crucial for both issuers and investors. Understanding that a firm commitment guarantees the sale provides issuers with immediate funding certainty, while a best-efforts model introduces more unpredictability in terms of the total capital raised. Therefore, the correct answer accurately reflects the fundamental difference between these two types of offerings.