The Bull

Tuesday 16

October, 201812:42 PM



DICTIONARY : A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Backstop purchaser

What does it mean?

 

When an entity promises to purchase the remaining unsubscribed securities of a rights offering or issue, it is known as a backstop purchaser. The rights offering or issue is a group of rights offered to already committed shareholders to purchase additional stock shares through a subscription warrant, and when this agreement is established, the offering party can include a backstop purchaser to guarantee the complete sale of the shares. The security of knowing that all the new shares will be purchased helps the company meet the fundraising goal of the offering thanks to the provision of the backstop purchaser, sometimes called a standby purchaser.

 

When is a backstop purchaser used?

 

Backstop purchasing is essentially another form of underwriting that is only used as a safety measure to secure funds if the offered shares do not sell completely. The backstop purchaser is usually an investment bank, or in some cases, a collective assembly of multiple investment banks, that agree in advance to purchase the remaining unsubscribed shares if the underwriter fails to sell all the public shares. Some exchanges, such as the New York Stock Exchange, believe that shareholders do not have to approve rights offerings for cash, but in situations of insured rights offerings, such as when using a backstop purchaser, the exchange watches the fundraising efforts more closely.

 

How does backstop purchasing work?

 

In the primary round of a public offering, a company offers the existing shareholders a stock discount, which is followed by a second round where the company offers the shareholders the right to subscribe for any of the shares not sold in the initial round. The third round of a public offering uses underwriting agreements to sell the remaining shares to the public. After these three rounds of offerings, a backstop purchaser is usually allowed to purchase up to 19.9% of the total amount of common stock available before the rights offering took place.

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