What it is:
How it works/Example:
Let’s assume Company XYZ is going public. It plans to 10 million in an initial . Its investment bank, Bank ABC, agrees to underwrite the IPO. Bank ABC creates a document detailing Company XYZ’s business model, financial forecasts and the terms of the , and it meets with potential investors to gauge their interest in purchasing the 10 million . After this process, Bank ABC agrees to sell 9 million for $25 per . The remaining 1 million are unsubscribed, meaning they don't have a buyer.
Why it matters:
IPOs often become unsubscribed because the price is too high. Sometimes, a back stop purchaser agrees to buy leftover from the of an or rights . A back stop purchaser is like insurance -- the purchaser guarantees in some form that a company (and its ) raise the it intends to raise.
In our example, if for some reason Bank ABC can’t sell all the in the (this is called the unsubscribed portion), the back stop purchaser agrees to buy those leftovers. The back stop purchaser, of course, obtains a fee for agreeing to be the back stop because it is taking on the risk of having to purchase (and they try to reissue) the Company XYZ securities.