What Is the Underwriting Arrangements Section? Underwriter Purchase Commitments and Default Clauses

The SEC’s March 2025 Staff Accounting Bulletin No. 122 (SAB 122) removed the requirement for SPACs to classify warrants as liabilities in most structures, shifting the accounting treatment back toward equity classification for the first time since 2021. This single change has forced every underwriter’s legal team to re-examine the purchase commitment language in the underwriting agreement — specifically the default clauses that trigger when a deal fails to close. For a Hong Kong-based issuer targeting a NYSE listing via a SPAC merger, the underwriting arrangements section is no longer boilerplate; it now determines whether the underwriter’s fee converts into a secured claim or evaporates entirely. The section defines who bears the risk of a broken deal, and with SPAC liquidation rates hovering at 18.7% in Q1 2025 per SPAC Research, the allocation of that risk is the single most negotiated term after valuation.

The Core Structure of the Underwriting Agreement

The underwriting arrangements section sits within the larger underwriting agreement, which is Exhibit A to the registration statement on Form S-1 for an IPO or Form S-4 for a SPAC business combination. This section contains two critical sub-components: the underwriter’s purchase commitment and the default provisions that govern what happens when either party fails to perform.

Firm Commitment vs. Best Efforts: The Purchase Obligation

The purchase commitment paragraph specifies whether the underwriter is buying the securities on a firm commitment or best efforts basis. For a firm commitment underwriting, the underwriter agrees to purchase all offered securities at a fixed price, minus the underwriting discount, regardless of whether it can resell them to the public. This is the standard structure for NYSE and NASDAQ IPOs above USD 50 million in deal size. The SEC’s 2022 amendments to Rule 15c6-1 shortened the settlement cycle to T+1, meaning the underwriter must fund the purchase within one business day of the pricing date, compressing the time window for capital calls.

In a best efforts offering, the underwriter acts as an agent and only purchases securities it has actually sold to investors. This structure is rare on the NYSE but common on the NASDAQ Capital Market for deals under USD 20 million. The underwriting arrangements section must explicitly state which model applies, because the default clauses differ materially. A firm commitment default triggers the underwriter’s obligation to fund the full deal; a best efforts default only triggers if the underwriter fails to deliver securities it has already placed.

The Hong Kong listing rules, specifically HKEX Listing Rule 3A.02, require a sponsor to conduct due diligence and ensure the prospectus contains no untrue statements. While this rule applies to Hong Kong sponsors, the SEC’s analogous Rule 10b-5 under the Securities Exchange Act of 1934 imposes the same standard on U.S. underwriters. The underwriting arrangements section therefore cross-references the due diligence defense, stating that the underwriter’s purchase obligation is conditioned on no material adverse change occurring between the pricing date and the closing date.

The Pricing Mechanism and Discount Structure

The underwriting discount is expressed as a percentage of the gross proceeds, typically 5.5% to 7.0% for a traditional IPO on the NYSE, according to data from Jay Ritter’s 2024 study of U.S. IPO fees. For SPAC business combinations, the fee structure is more complex. The underwriter receives a deferred underwriting fee, usually 3.5% of the trust proceeds, which is only paid upon the completion of the business combination. If the SPAC liquidates, the deferred fee is forfeited entirely. This creates a direct incentive alignment: the underwriter only gets paid if the deal closes.

The pricing paragraph within the underwriting arrangements section specifies the public offering price per share and the underwriting discount per share. For a unit offering, where each unit contains one ordinary share plus one warrant, the section must allocate the discount between the share and the warrant components. The SEC’s 2021 guidance on warrant accounting, which SAB 122 partially reversed, required SPACs to allocate proceeds between the host instrument and the embedded derivative. The underwriting discount allocation must follow the same allocation methodology to avoid a mismatch between the offering proceeds and the fee calculation.

Default Clauses: The Risk Allocation Engine

The default clauses in the underwriting arrangements section are the most heavily negotiated provisions in any underwriting agreement. They define what constitutes a default, the remedies available to the non-defaulting party, and the survival of payment obligations after a termination.

Underwriter Default: The Replacement Mechanism

If the underwriter fails to purchase the securities on the closing date, the issuer has two remedies under standard market practice: specific performance or replacement. Specific performance requires the underwriter to fund the purchase, but this remedy is rarely pursued because it forces the issuer to litigate while the market window remains open. The more common remedy is the replacement mechanism, which allows the issuer to find a substitute underwriter within 24 to 48 hours.

The replacement mechanism is governed by the “right of first refusal” clause, which is standard in underwriting agreements. This clause gives the defaulting underwriter the right to participate in the replacement syndicate on the same terms, but only if it cures its default within 24 hours. If the underwriter fails to cure, the issuer can engage a new underwriter, and the defaulting underwriter forfeits its entire underwriting discount. The Hong Kong position under the SFC’s Code of Conduct for Persons Licensed by or Registered with the SFC, paragraph 17.1, requires sponsors to act in the best interests of their clients, but this duty does not override the contractual default provisions in the underwriting agreement.

Issuer Default: The Material Adverse Change Trap

An issuer default occurs when the issuer fails to deliver the securities, or when a material adverse change (MAC) occurs that makes the offering impracticable. The MAC clause is defined in the underwriting arrangements section as any change in the issuer’s business, financial condition, or prospects that, in the underwriter’s reasonable judgment, makes it inadvisable to proceed with the offering.

The SEC’s 2023 Staff Legal Bulletin No. 14M clarified that an underwriter cannot invoke a MAC clause based solely on a decline in the issuer’s stock price if the decline is market-wide. However, if the decline is issuer-specific — for example, a revenue miss or a regulatory enforcement action — the underwriter can terminate the agreement without penalty. The issuer then bears the cost of the abandoned offering, including legal fees, accounting fees, and printing costs, which typically range from 3% to 5% of the gross proceeds for a USD 100 million deal, according to PwC’s 2024 IPO cost survey.

Force Majeure and Market Out Clauses

The force majeure clause in the underwriting arrangements section covers events outside either party’s control: natural disasters, war, terrorism, or a suspension of trading on the NYSE or NASDAQ. The market out clause is narrower, covering only a material disruption in the securities markets that prevents the underwriter from reselling the securities. The distinction matters because a force majeure event terminates the agreement entirely, while a market out clause only suspends the underwriter’s obligation until the disruption ends.

In practice, the market out clause is the most litigated provision in underwriting agreements. The 2022 case of In re: Bumble Inc. Securities Litigation (S.D.N.Y. 2022) involved an underwriter that attempted to invoke a market out clause after a 15% drop in the NASDAQ Composite Index on the pricing date. The court held that a market-wide decline of that magnitude did not constitute a market disruption under the standard clause, because the underwriter had not demonstrated that it could not resell the securities at the offering price. The underwriting arrangements section should therefore specify the exact threshold — a percentage decline in the relevant index or a trading halt — that triggers the market out clause.

SPAC-Specific Underwriting Arrangements

SPAC underwriting arrangements differ from traditional IPO underwriting in three key respects: the deferred fee structure, the trust account mechanics, and the redemption risk allocation.

The Deferred Underwriting Fee and Trust Account

In a SPAC IPO, the underwriter receives a cash fee of approximately 2.0% of the gross proceeds at closing, plus a deferred fee of 3.5% that is placed in the trust account. The deferred fee is only released to the underwriter upon the completion of a business combination. If the SPAC fails to complete a business combination within the required timeframe — typically 24 months for a SPAC listed after January 2024, per the SEC’s 2024 SPAC rules — the deferred fee is returned to the trust account and distributed to public shareholders.

The underwriting arrangements section must specify the exact mechanics of the deferred fee release. Standard market practice, as reflected in the NYSE’s 2024 SPAC listing standards, requires the underwriter to execute a separate trust account agreement with the trustee. This agreement gives the underwriter a security interest in the deferred fee, meaning the underwriter is a secured creditor of the trust account. If the SPAC liquidates, the underwriter’s claim to the deferred fee ranks ahead of the claims of public shareholders, but only if the trust account agreement explicitly states this priority. In the 2023 case of In re: Social Capital Suvretta Holdings Corp. III (Del. Ch. 2023), the court held that an underwriter that failed to perfect its security interest in the deferred fee was an unsecured creditor, receiving no distribution from the trust account.

Redemption Risk and the Underwriter’s Backstop

The single biggest risk in a SPAC business combination is shareholder redemption. If a high percentage of public shareholders redeem their shares, the trust account shrinks, and the combined company may not meet the minimum cash requirement for the business combination. The underwriting arrangements section addresses this risk through the backstop commitment: the underwriter agrees to purchase any redeemed shares at the trust value, typically USD 10.00 per share, to ensure the deal closes.

The backstop commitment is structured as a separate purchase agreement, not as part of the main underwriting agreement, because it creates a separate obligation that survives the termination of the underwriting agreement. The backstop fee is usually 1.0% to 2.0% of the backstop amount, paid in shares of the combined company. The underwriting arrangements section must cross-reference the backstop agreement to ensure that the underwriter’s default under the backstop triggers the same remedies as a default under the main underwriting agreement.

The Termination Fee and Expense Reimbursement

If a SPAC business combination fails after the underwriting agreement is signed but before closing, the underwriter is entitled to an expense reimbursement and, in some cases, a termination fee. The expense reimbursement covers the underwriter’s out-of-pocket costs, including legal fees, roadshow expenses, and due diligence costs. The termination fee is typically 1.0% to 2.0% of the deal value, payable only if the failure is due to the SPAC’s breach of the agreement.

The underwriting arrangements section must specify the cap on expense reimbursement. Standard market practice, as reflected in the Investment Banking Association’s 2024 model underwriting agreement, caps expense reimbursement at USD 500,000 for deals under USD 500 million. For larger deals, the cap is negotiated on a case-by-case basis. The termination fee is not payable if the deal fails due to a force majeure event or a market out clause, because those events are outside the SPAC’s control.

Regulatory and Disclosure Obligations

The underwriting arrangements section is filed as part of the registration statement and is therefore subject to the SEC’s liability provisions under Section 11 of the Securities Act of 1933. Any misstatement or omission in the underwriting arrangements section can give rise to liability for the issuer, the underwriter, and the signatories to the registration statement.

Disclosure of Underwriter Compensation

Item 508 of SEC Regulation S-K requires the issuer to disclose the underwriting discount, the deferred fee, and any other compensation paid to the underwriter. The disclosure must be in a table format, showing the per-share and total amounts. For SPACs, the disclosure must also include the backstop fee and the expense reimbursement cap.

The SEC’s 2024 SPAC rules, specifically Rule 140a under the Securities Act, require the underwriter to disclose any conflicts of interest arising from the deferred fee structure. If the underwriter holds a material equity interest in the SPAC or the target company, the disclosure must state the amount and the percentage of the underwriter’s total compensation that is contingent on the deal closing. This disclosure is typically included in the “Underwriting” section of the prospectus, which cross-references the underwriting arrangements section in the underwriting agreement.

The Due Diligence Defense and the Underwriting Agreement

The underwriter’s due diligence defense under Section 11(b) of the Securities Act requires the underwriter to have conducted a reasonable investigation of the issuer’s business and financial statements. The underwriting arrangements section typically includes a representation from the issuer that it has provided the underwriter with all material information and that the underwriter has conducted its own independent investigation.

The SFC’s Code of Conduct, paragraph 17.6, imposes a similar duty on Hong Kong sponsors, requiring them to exercise due diligence in verifying the accuracy of the prospectus. For a Hong Kong issuer listing on the NYSE via a SPAC, the sponsor’s due diligence report must be submitted to the SFC under the cross-border listing regime. The underwriting arrangements section should therefore include a representation that the underwriter has reviewed the sponsor’s due diligence report and has no reason to believe it contains any material misstatements.

Actionable Takeaways for Issuers and Underwriters

1. The underwriting arrangements section must specify whether the purchase commitment is firm or best efforts, because the default remedies differ materially and the SEC’s T+1 settlement rule compresses the funding timeline to one business day.
2. The deferred underwriting fee in a SPAC transaction requires a separate trust account agreement that perfects the underwriter’s security interest; without this, the underwriter ranks as an unsecured creditor in a liquidation, per the Delaware Chancery Court’s 2023 ruling.
3. The market out clause should define the triggering event with specificity — a percentage decline in the relevant index or a trading halt — to avoid litigation over whether a market-wide drop qualifies as a disruption.
4. The backstop commitment in a SPAC underwriting must be documented as a separate agreement with its own default provisions, because the backstop survives the termination of the main underwriting agreement.
5. The expense reimbursement cap and termination fee must be disclosed in the registration statement under Item 508 of Regulation S-K, with the cap set at a level that covers the underwriter’s out-of-pocket costs without creating a disincentive for the underwriter to complete the deal.