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 an IPO?25 Views
And finance allah shmoop What is an i p o
Well this is a hippo and it has nothing to
do with an ipo Auras Normal humans pronounce it if
both well actually most people just spell it out I
po It stands for initial public offering In the three
words tell the story and i pl refers to a
company who's raising money by selling shares of itself to
the public for the first time a maiden voyage in
public funding if you will Whatever dot com has forty
million shares outstanding after three private rounds with venture capitalists
and private investors it wants to raise money to go
big internationally And for the first time it will offer
shares to joe and jill public And that means that
all of it shares will be tradable publicly on the
open market like on nasdaq or the new york stock
exchange That is the insiders early investors founders et cetera
will be able to just call their broker at schwab
or fidelity or wherever and sell their shares get liquid
and buy themselves a maserati because it's not what everyone
does after a nice meal So whatever dot com sells
ten million shares a twelve bucks each to raise one
hundred twenty million dollars which they can spend to build
out offices all over the world So yeah that's an
ai po and that's Why a company generally wants to
make shares available to the public because once you've made
an initial public offering and you make money off the
sales of your stock you khun by as many hippos
as you like and just remember to feed them three
times a day they get Cranky if they go too 00:01:35.158 --> [endTime] long in between No
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