Backstop Fee: Securing Capital in Securities Offerings
The backstop fee is a payment made to a backstop purchaser or underwriter as compensation for their commitment to buy any unsubscribed shares in a securities offering, such as an initial public offering (IPO) or a rights offering. This fee ensures that the company raising capital can meet its fundraising requirements by guaranteeing that all issued shares will be purchased, even if there is insufficient demand from other investors.
Key points about backstop fees include:
- Purpose: The backstop fee is paid to secure a backstop arrangement, where the backstop purchaser agrees to buy any remaining unsubscribed shares, providing a secondary source of funds. 15
- Calculation: The fee is typically calculated as a percentage of the total issue amount and is paid by the company issuing the securities. 12
- Example: In a rights offering, if a company issues shares and not all are subscribed by existing shareholders, the backstop purchaser buys the remaining shares, ensuring the company meets its fundraising goal. The backstop fee is paid for this service. 45
- Importance: Backstop fees are crucial for companies that need to raise a specific amount of capital, as they provide assurance that the fundraising requirements will be met. 57