Back Stop
What is a 'Back Stop'
A back stop is the act of providing last-resort support or security in a securities offering for the unsubscribed portion of shares. A company tries to raise capital through an issuance, and to guarantee the amount received through the issue, it gets a back stop from an underwriter or major shareholder to buy any of the unsubscribed shares.
Explaining 'Back Stop'
For example, in a rights offering, you might hear "ABC Company will provide a 100% back stop of up to $100 million for any unsubscribed portion of the XYZ Company rights offering." If XYZ is trying to raise $200 million but only raises $100 million through investors, then ABC Company purchases the remainder.Back Stops as Insurance
While not an actual insurance plan, a back stop provides security through the guarantee a particular amount of shares will be purchased if the open market does not produce enough investors. By entering into a firm commitment underwriting agreement, the associated organization has claimed full responsibility for the quantity of shares specified if they initially go unsold, and promises to provide the associated capital in exchange for the available shares. This gives assurance to the issuer that the minimum capital can be raised regardless of the open market activity. Additionally, all risk associated with the specified shares is effectively transferred to the underwritten organization.
Share Ownership
If the underwriting organization takes possession of any shares, as specified in the agreement, the shares are its to manage as it sees fit, and are treated the same as any other investment purchased through normal market activity. The issuing company can impose no restriction on how the shares are traded. The underwriting organization may hold or sell the associated securities per the regulations that govern the activity overall.
Further Reading
A fiscal backstop to the banking system
www.elgaronline.com [PDF]
… Once the Single Resolution Fund becomes a label of solidity, other Member States may increasingly elect to par- ticipate in both the SSM and SRM, as they realise the economics of scale … This back- up by the government is commonly referred to as the fiscal backstop …
www.elgaronline.com [PDF]
… Once the Single Resolution Fund becomes a label of solidity, other Member States may increasingly elect to par- ticipate in both the SSM and SRM, as they realise the economics of scale … This back- up by the government is commonly referred to as the fiscal backstop …
www.tandfonline.com [PDF]
… Once the Single Resolution Fund becomes a label of solidity, other Member States may increasingly elect to par- ticipate in both the SSM and SRM, as they realise the economics of scale … This back- up by the government is commonly referred to as the fiscal backstop …
pubs.aeaweb.org [PDF]
… Once the Single Resolution Fund becomes a label of solidity, other Member States may increasingly elect to par- ticipate in both the SSM and SRM, as they realise the economics of scale … This back- up by the government is commonly referred to as the fiscal backstop …
papers.ssrn.com [PDF]
… Once the Single Resolution Fund becomes a label of solidity, other Member States may increasingly elect to par- ticipate in both the SSM and SRM, as they realise the economics of scale … This back- up by the government is commonly referred to as the fiscal backstop …
journals.sagepub.com [PDF]
… Once the Single Resolution Fund becomes a label of solidity, other Member States may increasingly elect to par- ticipate in both the SSM and SRM, as they realise the economics of scale … This back- up by the government is commonly referred to as the fiscal backstop …
heinonline.org [PDF]
… Once the Single Resolution Fund becomes a label of solidity, other Member States may increasingly elect to par- ticipate in both the SSM and SRM, as they realise the economics of scale … This back- up by the government is commonly referred to as the fiscal backstop …
www.sciencedirect.com [PDF]
… Once the Single Resolution Fund becomes a label of solidity, other Member States may increasingly elect to par- ticipate in both the SSM and SRM, as they realise the economics of scale … This back- up by the government is commonly referred to as the fiscal backstop …
academic.oup.com [PDF]
… Once the Single Resolution Fund becomes a label of solidity, other Member States may increasingly elect to par- ticipate in both the SSM and SRM, as they realise the economics of scale … This back- up by the government is commonly referred to as the fiscal backstop …
heinonline.org [PDF]
… Once the Single Resolution Fund becomes a label of solidity, other Member States may increasingly elect to par- ticipate in both the SSM and SRM, as they realise the economics of scale … This back- up by the government is commonly referred to as the fiscal backstop …
Tags:2020assetbackedbankbankingcommoncompanycongresscrisisdebtdefinitioneconomiceconomicseconomyfederalfinancefinancialfinancingfiscalinstitutioninterestinvestorsissuelibertyliquiditymarketmillionmoneyofferingplacepolicypublicresearchreserveresourcesecuritiesstockstreetsystemtermtheoriesuniversityworldyahoo
Q&A About Back Stop
What is an example of a backstop resource?
An example of a backstop resource would be fossil fuels. Fossil fuels are considered to be a limited and heavily used resources that have been replaced with renewable energy sources such as solar power and wind power. These renewable energy sources are considered to be alternative resources because they are not finite or heavily used like fossil fuels. Therefore, these alternative resources can replace fossil fuels when needed in order to keep up with demand for energy.
What is not included in this definition of insurance plan?
This definition does not include any actual insurance plans.
How does a company guarantee capital through an issuance?
The company tries to raise capital through an issuance, and to guarantee the amount received through the issue, it gets a back stop from an underwriter or major shareholder to buy any of the unsubscribed shares.
Who can provide back stops?
Underwriters and major shareholders can provide back stops.
Where does the backstop resource theory come from?
The backstop resource theory was created by ______________.
What is the Backstop Resource Theory?
The backstop resource theory states that as a heavily used limited resource becomes expensive, alternative resources will become cheap by comparison, therefore making the alternatives economically viable options.
What is a back stop?
A back stop is the act of providing last-resort support or security in a securities offering for the unsubscribed portion of shares.