Rights issues, entitlement offers and share purchase plans may be underwritten. This means that an underwriter (usually a broker or bank) is guaranteeing that the amount sought by the company will be raised. Put simply, if a company launches a $10m fully-underwritten entitlement offer but only received subscriptions from shareholders for $7m, then the underwriter will subscribe and pay for the remaining $3m. In return for assuming this risk, the underwriter usually receives a cash fee.

A sub-underwriter may be appointed to take up some or all of the underwriter’s subscription obligation. A sub-underwriter assumes a portion of the risk and usually receives a cash fee for doing so. Sophisticated/professional investors can be invited to bid for sub-underwriting.

A typical sub-underwriting process would run like this:

1. The underwriter and the company agree on the terms of the offer (entitlement offer, rights issue or SPP) and sign an agreement.

2. Before the offer is announced to the market, the underwriter (usually a broker) approaches sophisticated/professional investors and offers them the opportunity to be sub-underwriters.

3. Investors submit firm bids for the sub-underwriting. For example, Investor X communicates to the broker that he would like to sub-underwrite for $50,000.

4. The underwriter collects the bids and sends out confirmation letters. These letters are not final allocations, they outline the dates, structure and terms of the sub-underwriting for the investor. By signing, the investor has taken the underwriting risk ($50,000 in this case) from the underwriter. They will be required to subscribe for up to $50,000 of shares under the offer, if there is a shortfall.

5. The offer (entitlement offer, rights issue or SPP) is then announced to the market and shareholders are invited to participate.

6. Once the offer closes, the underwriter contacts sub-underwriters them and notifies them of the shortfall and their obligation.

   • If the offer is fully subscribed (e.g. $10m is received from shareholders for a $10m offer) then the sub-underwriter is not required to subscribe for any shares. They still receive a fee for taking risk during the offer.

   • If only $5m of the $10m offer is taken up by shareholders then there is $5m of shortfall to be distributed to sub-underwriters. Assuming that the offer is fully underwritten ($10m), sub-underwriters will receive half of their commitment amount ($5m shortfall from $10m underwritten, 50%). In this case, the investor will be required to subscribe for $25,000 of shares from their $50,000 sub-underwriting commitment.

7. An offer letter is sent to investors which outlines the number of shares they are required to subscribe for and the settlement timetable. Settlement will occur at the same time for all participants in the offer (existing shareholders and new sub-underwriters).