What is meant by "best efforts" in underwriting?

In the context of underwriting, "best efforts" refers to a type of agreement in which the underwriter commits to selling as many shares of a new issue as possible but does not guarantee the sale of all shares. This means that the underwriter does not take on the risk of purchasing unsold shares; rather, they will make their best effort to sell the shares to investors and, if any shares remain unsold after the offering period, the issuer retains those shares. This option allows for a more flexible approach to underwriting, as it aligns the interests of the issuer and the underwriter without imposing undue financial risk on the underwriter.

In contrast to other underwriting arrangements, such as firm commitment, where the underwriter agrees to buy all issued shares and assumes the risk for any unsold portions, the "best efforts" approach limits the underwriter's liabilities, making it a less risky option for them. This is particularly beneficial for companies that may not be certain about the demand for their securities in the market.