Soft underwriting happens when an underwriter agrees to buy shares in an IPO at a stage after the issue is closed. He, then, immediately places those shares with institutional players. Thus the risk faced by the underwriter is reduced to a small window of time.
- Also, the soft underwriter has the option of invoking a Force Majeure (acts of god) Clause in case there are certain factors beyond his control that can affect his ability to place the shares with the buyers.
- Soft underwriting is different from hard underwriting, which is when an underwriter agrees to buy his commitment of shares before the issue opens. The underwriter guarantees a fixed amount to the issuer from the issue.
- Thus, in case the shares are not subscribed to by investors, the issue is devolved on the underwriters and they have to bring in the amount by subscribing to those shares. The hard underwriter bears a risk that is much higher than that in soft underwriting.