What is a standby commitment in the context of a rights offering?

A standby commitment is an underwriting agreement where an underwriter agrees to purchase any shares that remain unsold after a rights offering has been executed. In a rights offering, existing shareholders are given the opportunity to purchase additional shares, usually at a discounted price, before new investors can buy these shares. The standby commitment serves as a safety net for the issuing company, ensuring that all shares will be distributed and that the company will raise the intended capital, even if existing shareholders do not fully exercise their rights.

This arrangement minimizes the risk for the issuer, as they know that any unsold shares will still be purchased by the underwriter. This commitment is especially important in rights offerings, which may have lower participation rates from existing shareholders, and helps to maintain the desired capital-raising target. Other options, while relevant in investment contexts, do not accurately reflect the specific nature of standby commitments in rights offerings.