Standby underwriting is an underwriting used in connection with a preemptive rights offering. The standby underwriter must purchase any shares not subscribed to by existing shareholders.
Applying "Standby Underwriting" to Securities Exams:
If a corporation wants to sell additional shares of common stock, the existing shareholders must be offered the right to purchase the securities prior to the offering being made available to new shareholders. This is known as a shareholder’s preemptive right. If the existing shareholders do not purchase all of the securities the stand by underwriter will purchase any shares not subscribed to by current shareholders.