Securities Consignment Sales and Securities Underwriting: The Differences

According to the nature of the legal relationship between the underwriter and the issuer, securities underwriting can be divided into securities consignment sales and securities underwriting. China's Securities Law Article 26, Paragraph 1, clearly stipulates that "securities underwriting business is carried out through consignment sales or underwriting."

1. Securities Consignment Sales

According to the provisions of Article 26, Paragraph 2, of the Securities Law: "Securities consignment sales refer to the method of underwriting where a securities company sells securities on behalf of the issuer, and at the end of the underwriting period, all unsold securities are returned to the issuer." The relationship established between the issuer and the underwriter is one of entrustment and agency. The underwriter, as the promoter of the issuer, does not advance funds and bears no responsibility for securities that are not sold out, hence the risk of securities issuance is essentially borne by the issuer themselves. Therefore, to reduce the risk of issuance, issuers often specifically agree in the consignment contract that the underwriter should take various necessary measures to ensure the maximum subscription to the securities issuance. Since underwriters in consignment sales cannot guarantee that the issuer will promptly obtain all the funds needed, issuers with high visibility or credit rating, sufficient market information, and confidence that the securities can be sold out within a short period, will choose this method of securities underwriting.

In China, securities consignment sales are mainly used for the issuance of corporate bonds and are rarely used in the public issuance of stocks. However, the "Securities Issuance and Underwriting Management Measures" Article 23 clearly stipulates: "If a listed company's non-public offering of shares does not adopt a self-sale method or if a listed company issues shares as a bonus, the consignment method should be adopted." Article 24 of the same regulation also stipulates: "If the stock issuance adopts the consignment method, the measures to be taken after the failure of the issuance should be disclosed in the issuance announcement (or subscription invitation). After the failure of the stock issuance, the lead underwriter should assist the issuer to return the subscribed stocks to the subscribers at the issue price plus the interest of the bank's current deposit."

2. Securities Underwriting

According to the provisions of Article 26, Paragraph 3, of the Securities Law, "Securities underwriting refers to the method of underwriting where a securities company either purchases all the securities of the issuer according to an agreement or purchases all the remaining securities after the underwriting period ends." In securities underwriting, the underwriter agrees on a base price with the issuer, signs an underwriting agreement, and then organizes efforts to sell in the securities market in a certain way. When the actual subscription amount does not reach the predetermined issuance amount, the remaining part is taken over by the underwriter, who bears the risk of securities issuance. Since securities underwriting can transfer the main risk of securities issuance failure to the underwriter, thereby minimizing the issuer's issuance risk, this method of underwriting has become the most widely used securities underwriting method in the securities markets of various countries. In China, securities underwriting is basically adopted when stocks are publicly issued. However, the law does not make mandatory provisions for this. Securities underwriting can be divided into three methods: full underwriting, balance underwriting, and fixed amount underwriting. But China's Securities Law only recognizes full underwriting and balance underwriting.