What is a ‘Back Stop’
A back stop is the act of supplying last-resort assistance or security in a securities offering for the unsubscribed portion of shares. A company tries to raise capital through an issuance, and to guarantee the amount received through the issue, it gets a back stop from an underwriter or major shareholder to purchase any of the unsubscribed shares.
BREAKING DOWN ‘Back Stop’
For example, in a rights offering, you might hear “ABC Company will provide a 100% back stop of approximately $100 million for any unsubscribed portion of the XYZ Business rights offering.” If XYZ is trying to raise $200 million but only raises $100 million through investors, then ABC Business purchases the remainder.
Back Stops as Insurance Coverage
While not an actual insurance coverage plan, a back stop offers security through the guarantee a specific quantity of shares will be bought if the free market does not produce adequate financiers. By participating in a firm commitment underwriting arrangement, the associated organization has claimed full responsibility for the quantity of shares specified if they initially go unsold, and promises to offer the associated capital in exchange for the offered shares. This gives assurance to the company that the minimum capital can be raised despite the free market activity. In addition, all danger connected with the specified shares is successfully transferred to the underwritten company.
If the underwriting organization acquires any shares, as defined in the contract, the shares are its to handle as it pleases, and are dealt with the like any other financial investment acquired through typical market activity. The providing business can enforce no restriction on how the shares are traded. The underwriting organization may hold or offer the associated securities per the regulations that govern the activity in general.
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