How does a bought deal work with an IPO?

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When an investment bank buys securities from an issuer prior to offering them for sale to the public, it is considered a bought deal. The investment bank (underwriter) then becomes the principal instead of the agent and negotiates a sale price with the issuer.

Both the issuer and the underwriter benefit from a bought deal. The plus side of a bought deal for the issuer is the freedom to not worry about financing risk. The underwriters benefit from bought deals typically being lower priced for marketability thus making it easier to sell shares.

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