Quick Answer
A placement agent can distribute a private offering under one of five methods: firm commitment, standby, best efforts, all-or-none, or mini-max. Each method assigns the risk of an unsold shortfall differently between the placement agent and the issuer, ranging from the agent buying the shortfall to the issuer simply not receiving full proceeds.
These five labels come from market practice, not from a single SEC or FINRA rule that defines them. Two related rules covered later in this unit use "all-or-none" and "firm commitment" as triggers for other purposes, but neither rule actually defines the term.
How Do the Five Methods Divide the Risk of an Unsold Offering?
The placement agent's written agreement with the issuer fixes which method applies, and that choice decides who is left holding an unsold shortfall.
| Method | Placement agent's commitment | If the offering falls short |
|---|---|---|
| Firm commitment | The placement agent purchases the securities from the issuer and resells them, taking any unsold portion onto its own books. | The placement agent absorbs the shortfall; the issuer is guaranteed its proceeds. |
| Standby | The placement agent commits, on a firm basis, to purchase whatever part of the offering is not otherwise placed by the end of the offering period. | The issuer still receives full proceeds; the placement agent's purchase covers the gap. |
| Best efforts | The placement agent agrees only to use its best efforts to sell the securities, taking no principal position and no obligation to buy unsold securities. | The issuer bears the shortfall; unsold securities are simply not issued. |
| All-or-none (AON) | A best-efforts variant: the entire offering must sell, or the deal is cancelled and all funds are returned. | Any shortfall cancels the whole offering. |
| Mini-max | A best-efforts variant with a floor and a ceiling: the offering must reach a stated minimum to close, and selling can continue up to a stated maximum. | Falling short of the minimum cancels the offering and returns funds; reaching the minimum lets the offering proceed toward the maximum. |
Exam Tip: Gotchas
- Firm commitment and standby both put the placement agent on the hook to buy a shortfall, but on different triggers. Firm commitment is a purchase of the whole issue up front. Standby only picks up whatever remains unsold at the end of the offering period.
- All-or-none has one trigger: sell all, or refund all. Mini-max has two thresholds instead, a floor that must be met before the offering can close, and a ceiling that caps how much more can be sold once the floor is met.
- All-or-none and mini-max never put the placement agent at risk. They define when the issuer gets nothing instead of something; the agent never buys the shortfall itself.
Why Doesn't a Rule Define These Terms?
No SEC or FINRA rule defines "firm commitment," "standby," "best efforts," "all-or-none," or "mini-max" as a distribution method. They are industry vocabulary the exam expects you to know, even though no single rule states it.
What Should You Check on Exam Day?
- Match each method to who absorbs an unsold shortfall: the placement agent (firm commitment, standby) or the issuer (best efforts, AON, mini-max).
- Distinguish all-or-none's single sell-all-or-refund-all trigger from mini-max's two-threshold floor-and-ceiling structure.
- Remember firm commitment is a purchase made up front; standby only picks up whatever remains unsold at the end.