Investment Company and Variable Contracts Products Representative (Series 6)Practice Exam

Under what circumstances does a stand-by underwriting occur?

1. When the issuer needs capital

2. Dilution of existing shareholder equity

3. When rights offering shares remain unsold

4. When all shares are sold

The correct answer is: When rights offering shares remain unsold

A stand-by underwriting occurs specifically in situations where rights offering shares remain unsold. In a rights offering, existing shareholders are given the opportunity to purchase additional shares at a set price, typically before these shares are made available to the broader market. However, there may be cases where not all offered shares are purchased by the existing shareholders. In a stand-by underwriting arrangement, a financial institution or underwriter agrees to purchase any remaining unsold shares after the rights offering period has expired. This ensures that the issuer can still raise the capital it needs, despite the fact that some investors chose not to take up their rights. The presence of a stand-by underwriter provides a safety net for the issuer, as it guarantees that the funds sought will still be obtained, even if demand from existing shareholders is lower than anticipated. Thus, the function of a stand-by underwriting is directly tied to unsold shares from the rights offering, making this situation the correct answer.