Firm Commitment Definition & Meaning | Financial Term | CSIMarket
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Glossary

Firm Commitment

Financial Term

Firm commitment is a term used in the financial industry that refers to a legally binding agreement between an underwriter and an issuer of securities. In this agreement, the underwriter agrees to purchase all of the securities being offered by the issuer and then sell them to investors at a set price. This is commonly used in the process of initial public offerings (IPOs), secondary offerings, and debt offerings.

In an IPO, for example, the issuer must first hire an underwriter to help them sell their shares to the public. The underwriter will then offer a firm commitment, meaning they will purchase all of the shares at a set price and then sell them to investors on the open market. This provides the issuer with a guaranteed source of capital, which they can use to fund future growth and expansion.

Firm commitment is often preferred by issuers because it reduces the risk of under subscription (not enough investor interest), and allows them to receive funding quickly. On the other hand, it increases the risk for the underwriter, as they are committing to a certain price and purchase volume, and if the market conditions change suddenly they may suffer losses.

Overall, firm commitment is a vital part of the financial industry, as it provides stability and certainty to both issuers and underwriters, enabling them to better meet their financing needs.


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