What is the potential drawback for dealers in a bought deal?

What is the potential drawback for dealers in a bought deal?

• A. No risk on capital investment
• B. Possibility of unsold shares
• C. Increased regulatory scrutiny
• D. Lower potential returns

Answer: (B)

In a bought deal, the investment bank buys securities from the issuer and then resells them to investors. This mechanism gives the issuer immediate capital but also poses risks for the dealers involved. The potential drawback here relates to the possibility of unsold shares. When a dealer underwrites shares, they accept a substantial obligation to sell those shares to the market. If the market appetite does not match the expected demand, the dealer could end up holding unsold shares, which can lead to financial losses.

This situation can arise if the market conditions change after the deal is struck or if investor interest shifts. Holding unsold shares could also tie up capital that would otherwise be used for other opportunities, and it may affect the dealer's overall leverage and liquidity.

The other options do not align with the core challenges of a bought deal. For example, while increased regulatory scrutiny exists in various contexts, it is not specific to the bought deal mechanism. Similarly, while lower potential returns can be a factor in broader investment scenarios, they are not a defining drawback of a bought deal itself. The capital investment risk is mitigated by the structure of the bought deal, making that option less relevant as well. Thus, the risk of unsold shares stands out as a significant drawback for