Special Private Placement Agreement
Background
The concept of executing capital increases in smaller amounts with greater frequency has been utilized by public companies for almost 20 years. It was originally called “dribble out” financing and developed by the Tier 1 investment banks, particularly Merrill Lynch. The Tier 1 banks and their clients felt the structure provided greater flexibility and the ability to take advantage of rising stock prices.
The structure worked particularly well for large caps as they had the ability to file shelf registrations and so could issue stock in small tranches at low cost. Generally the companies would complete the shelf registration, then as needed ask the Tier 1 bank for capital. The Tier 1 banks would generally complete the placement on a best efforts basis.
Benefits
When a company intends a capital increase and to use the proceeds over a period of time the dribble out structure enables management to fulfill its fiduciary obligation to minimize dilution to existing shareholders. The simple example of a company spending $10 million to build a new plant over 18 months demonstrates the economics of dilution:
In the case where the stock price rises and the funds are used proportionately over the period to build the plant, our example results in an average placement price of $1.50 instead of a one-time placement at $1.00.
So in the example the dilution suffered by existing shareholders for the capital increase is 33% less. If management anticipates a potentially rising stock price and is using the capital increase over a period of time, management may have a fiduciary obligation to utilize a dribble out type structure so as not to unnecessarily dilute existing shareholders.
Another primary benefit of the structure is to show financial strength without suffering significant dilution. This is often helpful when negotiating for an acquisition target or to assure institutional investors in the market that the company has sufficient capital to execute its business plan.
Problems and Solutions in Implementation:
The structure originally invented by the Tier 1 banks was basically not available to the many companies who could not issue stock easily and inexpensively, as was available with a shelf registration.
This forced many companies into the much more dilutive one time placement. In many countries, the time alone required to issue new stock (up to 4 months) made the structure prohibitive in terms of time as well as cost.
We have solved this problem by creating a three party structure which permits funding every 3 weeks while issuing new stock infrequently, for example once annually.
The basic mechanics are:
1) The company issues a notice requiring The Fund to buy shares (say 1 million shares)
2) A shareholder gives The Fund 1 million already issued shares
3) The Fund wires the company payment for 1 million newly issued shares (say
$5 million at $5 per share) and assigns the to-be-issued new shares to the shareholder.
4) The Company, shareholder, and The Fund repeats the foregoing process as often as the Company desires
5) At some point in the future agreed by the Company and the shareholder, the
Company goes through the process of issuing new shares which are automatically transferred to the shareholder.
The net result for all parties is:
1) Company: Completes capital increase with potentially much less dilution for existing shareholders. Company knows it has the capital available from the beginning once
2) The Fund signs the Subscription Commitment.
3) Shareholder: Typically happy to assist because the Company presumably uses the new capital increase to increase the value of all shares. The Shareholder has a net economic benefit as they end up with same amount of shares which presumably have increased in value.
4) Investor: Receives and pays for shares in small tranches as required by the Company.
5) Investor benefits from momentum strategy of buying stock that is increasing in price and cost averaging up.
6) The share transfer between the shareholder and The Fund (which is later reimbursed by the Company) can be either treated as a sale or a loan depending on the shareholder’s preference. Most shareholders prefer to structure it as a loan to avoid a taxable transaction from the transfer to The Fund.
Graphically, the process can be represented as follows: As often as the Company requires capital:
Draw 1 Draw 2 etc.
Whenever Company and Shareholder agree to process the issuance of new shares:
An additional issue that arose for mid and small cap issuers under the original dribble out financing structure was the uncertainty inherent in a periodic best efforts placement. The Fund improved upon this structure by providing a legal binding purchase obligation whenever the Company deems appropriate to place shares.
Equity Partners Fund SPC
Equity Partners Fund SPC provides fast, efficient and inexpensive access to equity capital.
We have commitments for funding on many exchanges including Frankfurt, Johannesburg and Sydney.
We generally look to invest amounts from $25 million up to $500 million directly into listed companies with consistent trading volumes for a variety of activities including working capital, accretive ebitda acquisitions and other growth opportunities.
We fund companies through the purchase of their shares based on a small discount off a volume weighted average price formula. The Company controls the timing and amount of each requested draw down.
Equity Partners Fund SPC is able to act quickly and is more flexible when it comes to structuring an investment. We focus on equity investments in public companies with market capitalizations under $5 billion, as well as private companies that will be listed on a securities exchange within six months of a funding commitment.
Equity Partners Fund SPC has no outside investors and is considered a private fund run by its principals, similar to a merchant bank that invests its own capital and as such it is seeking capital appreciation through the identification and funding of liquid growth companies.
Our funding agreements are not complicated and we can usually close within two weeks.
Please contact us today at www.epfundspc.com to learn how your company or a company you advise could benefit from our equity based funding structure.