All or none underwriting: Meaning, Criticisms & Real-World Uses

What Is All-or-None Underwriting?

All-or-none underwriting is a specific type of securities offering agreement within capital markets where the entire issue of securities must be sold by the underwriter or the offering is canceled, and all investor funds are returned. This condition is typically set by the issuer, meaning they require a minimum amount of capital for their project or operations to proceed; if they cannot raise the full amount, they prefer to raise none at all. Investors' funds are held in an escrow account until the condition is met¹⁶. If the stipulated amount is not raised by a specified deadline, the transaction is unwound, and all subscribed funds are returned to the investors.

History and Origin

The concept of all-or-none underwriting evolved as a protective measure for both issuers and investors within the framework of public offerings. Early securities regulations in the United States, such as the Securities Act of 1933, aimed to ensure transparency and protect investors by requiring detailed disclosures. As the complexity of capital raising grew, so did the need for specific rules governing offerings contingent on achieving a certain sales threshold.

The Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) have established rules, particularly SEC Rule 10b-9 and Rule 15c2-4, to regulate these contingent offerings. These rules are designed to prevent manipulation and ensure that investor funds are properly safeguarded and promptly returned if the conditions of the all-or-none underwriting are not met¹⁵. These regulations arose from a need to provide clear guidelines and investor protection for offerings where the success of the underlying venture heavily depends on securing the full intended financing.

Key Takeaways

All-or-none underwriting requires that all securities in an offering must be sold for the transaction to be completed.
If the entire offering is not sold by a specified deadline, all investor funds are returned, and the offering is canceled.
Investor funds for all-or-none offerings are held in a third-party escrow account to ensure their safety.
This type of underwriting is typically used when an issuer requires a specific minimum amount of capital for a project to be viable.
Regulations govern all-or-none offerings to protect investors and ensure fair practice.

Formula and Calculation

All-or-none underwriting does not involve a specific financial formula or calculation in the traditional sense, as its nature is binary: either 100% of the securities are sold, or 0% are. However, the core condition can be expressed simply:

\text{Total Securities Subscribed} \ge \text{Total Securities Offered}

If this condition is met by the specified closing date, the offering proceeds. If not, the offering is withdrawn. The calculation primarily involves monitoring the cumulative sales of the securities against the total target amount.

Interpreting the All-or-None Underwriting

The interpretation of all-or-none underwriting is straightforward: it signifies a pass/fail condition for a securities offering. For an issuer, choosing an all-or-none arrangement indicates that partial funding would not be sufficient for their intended purpose, such as funding a new venture or a significant expansion. They are essentially stating, "We need X amount of capital to make this work; anything less, and the project is not viable."

For investors, an all-or-none provision offers a layer of protection. It ensures that their capital will only be deployed if the issuer successfully raises the full amount needed, thus theoretically increasing the likelihood that the issuer's business plan can proceed as intended. This structure mitigates the risk of investing in an underfunded project. The funds remain in an escrow account and are not released to the issuer unless the condition is met, thereby safeguarding investor capital until the offering's success is confirmed¹⁴.

Hypothetical Example

Consider "GreenTech Solutions Inc.," a startup aiming to raise $10 million through a public offering to build a new eco-friendly manufacturing plant. GreenTech determines that less than $10 million would not be enough to complete the plant and begin operations effectively. Therefore, they decide to use an all-or-none underwriting agreement with an investment bank.

The investment bank, acting as the underwriter, begins selling shares to investors. All investor funds are placed into an independent escrow account. The agreement stipulates that if $10 million in subscriptions are not secured by December 31st, the offering will be canceled.

By December 31st, GreenTech Solutions Inc. has successfully secured commitments for $10.5 million. Since the all-or-none condition (selling at least $10 million) has been met, the funds are released from escrow to GreenTech, and the shares are issued to investors. If, however, only $9 million had been raised, the offering would have been terminated, and all $9 million would have been returned to the respective investors from the escrow account.

Practical Applications

All-or-none underwriting is primarily observed in securities offerings where the success of the underlying business plan or project hinges on securing a specific amount of capital. These include:

Venture Capital and Private Placements: Often used in smaller private placements or early-stage funding rounds for startups, where a certain funding threshold is critical for product development or market entry.
Real Estate Syndications: Projects requiring a minimum capital raise to purchase a property or fund construction may utilize this structure to ensure sufficient funds before proceeding.
New Business Ventures: Companies launching new initiatives or expanding operations that require a critical mass of funding to be viable often choose all-or-none terms.
Regulatory Compliance: The structure is closely monitored by regulatory bodies like the SEC and FINRA to ensure proper handling of investor funds and adherence to disclosure requirements for contingency offerings¹³. FINRA has emphasized that broker-dealers must ensure consistency between escrow agreements and offering documents and prevent the use of non-bona fide sales to meet the minimum, as such actions could violate anti-fraud provisions of federal securities laws¹².

Limitations and Criticisms

While all-or-none underwriting provides clear conditions for issuers and safeguards for investors, it comes with limitations and potential criticisms:

Risk for Issuers: If market conditions are unfavorable or investor interest is insufficient, an issuer risks failing to raise any capital at all, even if a significant portion of the offering was subscribed. This can delay or derail critical projects.
Limited Flexibility: The binary nature of all-or-none underwriting offers no flexibility. Unlike a "part-or-none" offering, where a lower minimum might allow for partial funding, all-or-none is absolute.
Potential for Non-Bona Fide Sales: Historically, there have been instances where issuers or their broker-dealers engaged in "non-bona fide" sales—such as purchases by affiliates or through nominee accounts—to create the appearance of a successful offering and meet the all-or-none condition. Regulatory bodies like FINRA actively monitor and prosecute such activities, which are considered fraudulent.
¹¹ Market Perception: A failed all-or-none offering can signal weakness or lack of investor confidence in the issuer or its project, potentially harming future capital-raising efforts.
Underwriter Incentives: Under an all-or-none arrangement, the underwriter (often part of a syndicate) earns no fee if the offering fails, which can lead to intense pressure to close the deal, sometimes tempting them to engage in aggressive or questionable sales practices, although strict regulations aim to prevent this.

All-or-none Underwriting vs. Best Efforts Underwriting

All-or-none underwriting is actually a specific type of best efforts underwriting. The key distinction lies in the condition for closing the offering.

In a best efforts underwriting, the underwriter acts as an agent for the issuer, committing only to use their "best efforts" to sell the securities. They do not guarantee the sale of all securities and do not take on the risk of unsold shares. Th¹⁰e offering can close even if only a portion of the securities is sold, provided any stated minimum (if applicable) is met.

I⁹n contrast, all-or-none underwriting imposes an explicit condition on a best efforts agreement: the entire offering must be sold, or it is completely canceled. Th⁸is means the underwriter's "best efforts" must result in the sale of all the securities for the deal to proceed. If the full amount is not raised, the funds are returned to investors.

The primary difference from a broader "best efforts" is the contingency: all-or-none is contingent upon 100% sale, whereas a general best efforts offering may close with less than full subscription, or with a lower minimum, such as in a "part-or-none" offering. This differentiates it significantly from a firm commitment underwriting, where the underwriter purchases all the securities from the issuer and then resells them to the public, taking on the full risk of unsold shares.

#⁷# FAQs

What happens if an all-or-none offering fails?

If an all-or-none offering fails to sell all the required securities by the stipulated deadline, the offering is canceled. All funds collected from investors, which are held in a third-party escrow account, are promptly returned to them without any deductions.

#⁶## Why would an issuer choose all-or-none underwriting?

An issuer typically chooses all-or-none underwriting when their project or business venture requires a minimum, specific amount of capital to be viable. If they cannot raise the full amount, receiving less would not enable them to achieve their objectives, making partial funding unproductive or even detrimental. This ensures they only proceed if fully funded.

Who holds the investor funds in an all-or-none offering?

In an all-or-none offering, investor funds are held in a qualified, independent escrow account, usually managed by a commercial bank or trust company unaffiliated with the issuer or broker-dealer. Th⁴, ⁵ese funds are segregated from the issuer's and underwriter's assets and are only released to the issuer if the all-or-none condition is met.

Is all-or-none underwriting common for large, established companies?

All-or-none underwriting is generally less common for large, established companies undertaking major public offerings. These companies often opt for firm commitment underwriting, where the underwriter guarantees the sale of the entire issue, or for standard best efforts underwriting with no "all-or-none" clause, as they may be able to proceed with a partial capital raise. All-or-none is more frequently seen with smaller companies, startups, or specific projects where absolute funding is critical.

What regulations govern all-or-none offerings?

All-or-none offerings are governed primarily by the SEC's Rule 10b-9 and Rule 15c2-4 under the Securities Exchange Act of 1934. These rules mandate that investor funds be promptly returned if the stated contingency (the all-or-none condition) is not met by a specific date, and that funds be held in a separate escrow account. FI², ³NRA also provides guidance and oversight to broker-dealers involved in these contingency offerings.¹