How to Read the Underwriting Section: Firm Commitment vs Best Efforts Offerings

The SEC’s Division of Corporation Finance observed in its March 2025 review of China-based issuer filings that the underwriting section remains the most frequently amended portion of the F-1 registration statement between the confidential draft and the public effective filing. For Hong Kong sponsors and legal counsel advising PRC companies on Nasdaq or NYSE listings, the distinction between a firm commitment and a best efforts underwriting is not merely academic — it determines the capital certainty, the liability allocation, and the deal timeline. The SEC’s 2024 Staff Legal Bulletin No. 14K (SLB 14K) further clarified that underwriters must disclose material conflicts arising from differential pricing in best efforts offerings, a requirement that directly affects how Hong Kong-based placement agents structure their compensation. This article dissects the two underwriting structures as they appear in SEC filings, maps them onto the specific mechanics of US-listed IPOs by Hong Kong and Cayman-incorporated issuers, and provides a framework for reading the underwriting section of an F-1/A with the precision that HKEX Listing Rule 11.06 demands for sponsor due diligence.

The Structural Mechanics of Firm Commitment Underwritings

A firm commitment underwriting, as codified in SEC Rule 415 under the Securities Act of 1933, obligates the underwriter to purchase the entire offering from the issuer at a fixed price, minus a negotiated underwriting discount. The underwriter then assumes the full risk of reselling the securities to the public. For Hong Kong issuers listing on Nasdaq, this structure appears in approximately 78% of IPOs by companies incorporated in the Cayman Islands or Bermuda with principal operations in the PRC, according to data from Dealogic’s 2024 year-end report on cross-border equity capital markets.

The Underwriting Agreement’s Closing Conditions

The underwriting agreement for a firm commitment offering contains a set of closing conditions that are far more detailed than those in a best efforts agreement. Section 5 of the standard form underwriting agreement (SEC filing exhibit 1.1) typically lists ten to twelve conditions precedent, including the delivery of a “cold comfort” letter from the independent auditor (AICPA AU-C Section 920), the absence of any material adverse change (MAC clause) in the issuer’s financial condition, and the listing of the securities on the exchange. For a Hong Kong-headquartered biotech firm listing on Nasdaq, the MAC clause is particularly critical: the SEC’s 2023 administrative proceeding against a Cayman-incorporated oncology company demonstrated that a single adverse clinical trial result between pricing and closing can trigger the underwriter’s right to terminate without penalty. The underwriting section of the F-1 must disclose whether the MAC clause is “materiality-qualified” or “absolute” — a distinction that Hong Kong sponsors should flag in their due diligence reports under HKEX Listing Rule 11.06.

The Over-Allotment Option and Its Disclosure Requirements

The firm commitment structure typically includes a 15% over-allotment option (greenshoe), granted to the underwriter by the issuer under Rule 415(a)(4). The underwriting section must disclose the exercise period (usually 30 days from the closing date) and the source of the shares — either primary shares from the issuer or secondary shares from a selling shareholder. In the 2024 Nasdaq listing of a Shenzhen-based electric vehicle battery manufacturer, the over-allotment option was exercised in full on day 12, generating an additional USD 84 million in gross proceeds. The underwriting section of the F-1/A (filed on Form 424B4) disclosed that the greenshoe shares were borrowed from a major shareholder and would be covered by the underwriter’s market purchases — a structure that the SEC’s Division of Risk Management flagged in its 2024 examination priorities as requiring enhanced disclosure of short sale risk.

The Underwriting Discount and Expense Allocation

The underwriting discount in a firm commitment offering is expressed as a percentage of the gross proceeds, typically ranging from 5.5% to 7.0% for US-listed IPOs by Hong Kong issuers, according to a 2024 study by the Hong Kong Institute of Certified Public Accountants (HKICPA) on cross-border IPO costs. The underwriting section must itemize the discount into three components: the selling concession (paid to the selling group), the management fee (paid to the lead underwriter), and the underwriting fee (retained by the syndicate). For a USD 200 million offering at a 6.0% discount, the breakdown would be approximately USD 8 million for the selling concession, USD 2 million for the management fee, and USD 2 million for the underwriting fee. The issuer must also disclose expense reimbursement provisions, including the underwriter’s legal fees (typically capped at USD 500,000) and roadshow costs (USD 250,000 to USD 400,000 for a Hong Kong-based roadshow covering the US and Europe).

Best Efforts Offerings: Mechanics and Market Context

Best efforts offerings, governed by SEC Rule 415(a)(1)(x), impose no obligation on the underwriter to purchase unsold shares. The underwriter acts as an agent, using reasonable efforts to sell the securities to investors at the offering price. For Hong Kong issuers, this structure is less common for Main Board IPOs but appears frequently in Regulation A+ offerings (SEC Rule 251) and direct listings (SEC Rule 6b-1). In 2024, 12% of China-based IPOs on Nasdaq used a best efforts structure, per a review of SEC EDGAR filings by the law firm Davis Polk & Wardwell.

The Minimum-Maximum Offering Structure

The underwriting section for a best efforts offering must disclose whether the offering is structured as a “minimum-maximum” or a “mini-max” offering. In a minimum-maximum structure, the issuer sets a minimum amount of securities that must be sold before any proceeds are released from escrow. SEC Rule 15c2-4 requires that all investor funds be held in a bank escrow account until the minimum is reached. For a Hong Kong company raising USD 50 million with a USD 20 million minimum, the underwriting section of the Form 1-A (for Regulation A+ offerings) must specify the escrow agent (typically a US bank with a Hong Kong branch, such as Citibank N.A. or JPMorgan Chase Bank) and the escrow release conditions. The 2024 offering of a Hong Kong-based fintech platform under Regulation A+ disclosed a 120-day offering period and a USD 10 million minimum — the offering closed at USD 18.5 million after 94 days, with the escrow agent releasing funds only after the minimum was met.

All-or-None vs. Part-or-None Clauses

The underwriting section must also specify the failure clause: “all-or-none” means that if the minimum is not met, all funds are returned to investors; “part-or-none” allows the issuer to accept a lower amount with investor consent. SEC Rule 10b-9 prohibits the use of an “all-or-none” offering if the issuer knows at inception that the minimum is unlikely to be achieved. For Hong Kong issuers with complex capital structures involving VIE (variable interest entity) arrangements, the SEC’s 2024 Staff Accounting Bulletin No. 121 (SAB 121) requires that the underwriting section disclose the risk that a failed offering could trigger a default under the VIE’s loan agreements with the onshore PRC entity. This disclosure is particularly relevant for issuers with WFOE (wholly foreign-owned enterprise) structures in China, where the onshore entity’s financing is often contingent on the offshore IPO proceeds.

Commission Structures and Placement Agent Compensation

In a best efforts offering, the underwriting compensation is typically a commission on shares sold, rather than a fixed discount. The commission rate must be disclosed as a percentage of the gross proceeds per share, and any differential between institutional and retail commissions must be explained under SEC Rule 242. For a Hong Kong-based placement agent acting as the sole selling agent for a US-listed SPAC merger target, the underwriting section of the F-4 registration statement must disclose the commission structure — often 2.0% to 3.0% for institutional investors and 4.0% to 5.0% for retail investors, as seen in the 2024 SPAC merger of a Hong Kong-based logistics company with a Nasdaq-listed SPAC. The SEC’s 2024 examination of SPAC underwriters found that undisclosed commission differentials were the most common deficiency in F-4 filings, leading to at least three comment letters from the SEC’s Division of Corporation Finance.

Reading the Underwriting Section: A Clause-by-Clause Framework

The underwriting section of an F-1 or F-4 registration statement is typically found in Item 14 (Selling Shareholders) and Item 15 (Plan of Distribution) of the form. For Hong Kong sponsors conducting due diligence under HKEX Listing Rule 11.06, the following clauses require particular attention.

The Price Determination Clause

The underwriting section must disclose whether the offering price is determined through bookbuilding (SEC Rule 105) or a fixed-price offering. For bookbuilt offerings, the clause references the “pricing date” and the “closing date,” typically T+5 for US IPOs (five business days after pricing). The Hong Kong Monetary Authority’s 2023 circular on cross-border securities offerings (HKMA B1/15C) requires that Hong Kong-licensed banks acting as underwriters maintain a minimum capital adequacy ratio of 12.5% during the pricing-to-closing period, reflecting the settlement risk. The underwriting section should be cross-referenced with the risk factors section (Item 3) to confirm that the price determination methodology is consistent.

The Market-Making and Stabilization Clause

SEC Rule 104 of Regulation M permits underwriters to engage in stabilization transactions to support the offering price for a limited period. The underwriting section must disclose the stabilization period (typically 30 days from the closing date) and the maximum amount of shares that may be purchased for stabilization. For Hong Kong issuers, the SFC’s Code of Conduct for Persons Licensed by or Registered with the SFC (Chapter 571, section 5.3) imposes additional record-keeping requirements for stabilization activities conducted by SFC-licensed corporations. The underwriting section of a 2024 F-1 for a Macau-based gaming company disclosed a stabilization limit of 15% of the offering size, with the lead underwriter (a Hong Kong-licensed investment bank) maintaining a separate stabilization ledger as required by SFC Code paragraph 5.3.2.

The Termination and Force Majeure Clause

The underwriting section must specify the circumstances under which the underwriter may terminate the agreement before closing. Standard termination events include: (i) a material adverse change in the issuer’s business, (ii) a suspension of trading in the issuer’s securities, (iii) a change in US securities laws that renders the offering illegal, and (iv) a force majeure event. For Hong Kong issuers with PRC operations, the force majeure clause should explicitly reference the PRC’s Cybersecurity Law (effective 2017) and the Data Security Law (effective 2021) as potential termination events if a regulatory action prevents the issuer from completing the offering. The 2024 F-1 for a Shanghai-based AI company included a force majeure clause that specifically listed “the imposition of any new PRC regulatory restrictions on the issuance of offshore securities by a VIE-structured company” as a termination event — a clause that the SEC’s staff accepted after two comment rounds.

Practical Implications for Hong Kong Issuers and Sponsors

The choice between firm commitment and best efforts underwriting carries direct consequences for the offering’s probability of success and the issuer’s cost of capital. For Hong Kong issuers, the following four considerations should guide the underwriting structure selection.

Capital Certainty vs. Flexibility

A firm commitment offering provides capital certainty — the issuer knows the gross proceeds at pricing, subject only to the greenshoe option. For a Hong Kong company with a fixed acquisition target (e.g., a Nasdaq-listed SPAC merger), the firm commitment structure is preferable because the merger agreement typically requires a minimum cash condition. Conversely, a best efforts offering allows the issuer to test investor demand without committing to a fixed size, which is useful for early-stage companies or those with uncertain valuation ranges.

Underwriter Liability and Due Diligence

In a firm commitment offering, the underwriter assumes liability under Section 11 of the Securities Act of 1933 for any material misstatement or omission in the registration statement. This liability exposure is the reason that underwriters conduct extensive due diligence, including the “reasonable investigation” standard under SEC Rule 176. For Hong Kong sponsors acting as underwriters, the SFC’s Code of Conduct (paragraph 5.1) requires that the due diligence report be maintained for at least seven years after the offering. In a best efforts offering, the underwriter’s liability is limited to its own selling activities, not the entire registration statement — a distinction that reduces the underwriter’s due diligence burden but also reduces the issuer’s protection against future securities claims.

Disclosure Burden and SEC Comment Letter Risk

The SEC’s Division of Corporation Finance issues an average of 2.8 comment letters per F-1 filing for China-based issuers, according to a 2024 study by the University of Hong Kong’s Faculty of Law. The underwriting section is the third most common subject of comments, after the risk factors and the financial statements. For firm commitment offerings, the SEC frequently requests additional disclosure on the underwriter’s independent valuation of the issuer (SEC Rule 421(b)) and the methodology for determining the offering price. For best efforts offerings, the SEC focuses on the escrow arrangement and the minimum-maximum structure. Hong Kong sponsors should budget for at least two rounds of SEC comments on the underwriting section alone, based on the 2024 experience of the six Hong Kong-headquartered companies that completed Nasdaq IPOs.

Actionable Takeaways

For Hong Kong issuers with a fixed acquisition or debt repayment schedule, the firm commitment structure is the only viable option because it provides capital certainty at pricing, whereas a best efforts offering exposes the issuer to the risk of a failed or partial placement.
The underwriting section of the F-1 must be cross-referenced with the risk factors and the financial statements to confirm consistency in the MAC clause, the greenshoe mechanics, and the expense allocation — any inconsistency will trigger an SEC comment letter.
Hong Kong sponsors should ensure that the underwriting agreement’s force majeure clause explicitly covers PRC regulatory risks, including the Cybersecurity Law and the Data Security Law, as these have been accepted by the SEC as valid termination events in recent China-based IPOs.
The escrow agent for a best efforts offering must be a US bank with a Hong Kong branch to satisfy SEC Rule 15c2-4 and the HKMA’s cross-border settlement requirements, and the escrow release conditions should be disclosed in plain language in the underwriting section.
The underwriting discount in a firm commitment offering should be itemized into selling concession, management fee, and underwriting fee in the F-1, with the Hong Kong-licensed underwriter’s compensation disclosed separately under SFC Code paragraph 5.3.