In a securities offering, a backstop is an act of providing last-resort backing or security for the unsubscribed part of shares. When a business seeks to raise money through issuance and wishes to guarantee the amount raised, it can acquire a backstop from an underwriter or a significant shareholder, such as an investment bank, to buy any unsubscribed shares.
A backstop is a financial arrangement where a secondary source of funds is created in case the primary source of funds does not meet the required needs. It can be thought of as an insurance policy for the buying party for buying unsubscribed shares, that guarantees the purchase of the remaining portion of unsubscribed shares by an underwriter or investment bank (hereby referred to as ‘providing organization’). It is also often thought of as a last-resort type of support, only in the case of transactions made on unsubscribed shares. The issuing firm (or the buying party) enters into a backstop contract with the providing organization upon making a transaction on such unsubscribed shares.