Backstop Purchaser
This is not a baseball team that signs up all the catchers they can find. Rather, a back-stop purchaser buys the leftover shares from the underwriter of an equity or rights offering. In that way, a back-stop purchaser is like an insurance policy. The purchaser guarantees that a company (and/or its investment bank) will raise the cash it needs to raise.
Example: Company A is going public. It plans to issue 10 million shares in an initial public offering (IPO). Bank B agrees to underwrite the IPO. Bank B does its research, or due diligence. Feeling good about the deal, Bank B agrees to sell the 10 million shares for $25 per share.
Bank B also comes to a special agreement with a wealthy hedge fund guy, Mr Hedge. Mr Hedge agrees to be Bank B's back-stop purchaser. If Bank ABC can't sell all the shares in the IPO, Mr. Hedge agrees to buy those leftovers. Being no dummy, Mr. Hedge obtains a fee for agreeing to be the back stop. He is taking on the risk of having to purchase and then trying to reissue Company A's securities.
Related or Semi-related Video
Finance: What is a Prospectus?14 Views
Finance a la Shmoop. What is a prospectus? Well it's just a marketing document,[prospectus book]
selling money and it outlines the basics of the investment, that the money being
raised is actually going for. That is like, what does the business do
for a living? How much revenue has it produced the
last few years? How much profit? How many units of whatever were sold? What did
those units cost the company to produce? Who's running this show and did [list of questions]
they have any felony convictions? Who's on the board? Any lawsuits outstanding
against the company? Yah it's stuff like that. So prospectus, is the set of papers
that covers all of the above and goes out with a new security that's being
offered to buyers and that can be equity and or debt and or both. Prospecti are
generally given for larger financial offerings. That cover more than just
sophisticated investors. For small private offerings, money is raised via a
very simple contract. Usually just a few pages are so. Covering the basics that a [man signing contract]
prospectus we cover and that includes what common industry parlance refers to
as a big boy letter. Meaning that if the investment goes fully bankrupt, that you
by signing here, you represent and warrant that you are a big boy or girl
and that you have the financial sophistication to understand the risks
and you won't cry about things if they turn sour. But small investment which
carries extremely high risk of full failure. [man walking with papers] Yeah those are usually done by
professionals ie the wealthy. So the government doesn't view them as needing
the same kind of training wheels and safety netting that the average Joe Blow
needs when he's making an investment. Prospecti are required in registered
offerings, to protect the average investor, from sleazy wheeler dealers. Who
might not disclose that the wastewater from the company's chemical processing
plant did in fact produce three headed fish downstream. As cool as it is to have[3 headed goldfish]
three headed fish, well three headed people, less cool. So it might be a
problem for that fertilizer producer in the future. That prospectus marketing
document reflects the fact that the company, is you know, prospecting for
money here. And in the process the company has to disclose all the basics
about what it's raising the money for, the good, the bad, and
the three-headed. Yeah glug-glug that's a prospectus. [man in study with scotch]
Up Next
What is an IPO? IPO stands for initial public offering. These are used when a company decides to go public; meaning people can buy shares of the co...
What is a greenshoe option? When Morgan Stanley launched Facebook’s IPO, they had humongous demand. The demand was so great that Morgan Stanley t...