Equity Line Financing

Equity Line Financing - is a type of funding that has been used by hedge funds to provide funding to companies looking to raise capital for growth or acquisitions. An equity line can be used by small or large companies and can be used in the United States, Asia, Europe and even Australia. It has been used for about ten years now in the United States and its popularity seems to be growing.

Recently, Australia has become active with equity line financing structures. Companies are discovering that they can use this vehicle in Australia to access capital for acquisitions, working capital for expansion or even paying down debt. The equity line is typically based on a formula similar to the ones used in the United States. The amount and frequency of funding are based on an agreed upon discount to the Volume Weighted Average Price (VWAP), as reported by Bloomberg, and a percentage of the trading volume during the pricing period. The company and investor usually agree on a pricing period that is comprised of fifteen trading days.

Please contact me if your company (United States, Australia, European, Canadian and even some Asian listed companies) is interested in Equity Line Financing or looking for an investor referral. I will glad to answer any questions you may have regarding structuring a transaction. Make sure that you have the necessary information and have examined all the various funding options before making a decision regarding Equity Line Financing. Contact Info.

One of the best uses a company can make of an equity line funding is to expand production or make an acquisition. Investors like Strategic acquisitions that provide cash flow and increase net profits usually increase stock holder value and a company's share price. Of course, the acquisition must be at a price and on terms favorable to the acquirer. Some private companies in the United States, Australia and Canada are even using equity line financing to get a Pre-listing Commitment from an investor in advance of a reverse merger or direct listing.

The Pre-listing Commitment can help solidify a private company's bridge loan needs. Investors may provide Bridge Loan Funding in the form of debt and/or equity if they know a company has a Prelisting Commitment for equity line financing from an investor.

Some companies prefer Equity Line Financing to other types of funding because it gives the company more control over the timing of its funding. A number of terms and conditions can be used to give the company more control over the draws down. Some of these conditions include:

      - discounts based on closing bid prices of the company's common stock;
      - cancellation notices if a minimum stock price is not maintained;
      - the company, not the investor, controls the amount of each draw down; and
      - the company controls when the draw down notices are given (which can only be given by the company).

Some companies use equity line financing, to have it in place when they need capital, even if they don't necessarily need capital at the time they file the registration statement. It can act as a safety net for small companies that are usually in constant need of capital during their development stage. Larger companies have been known to use them to make acquisitions.

The formula is based on the share price and trading volume of the company's common stock during the draw down period, which is usually five trading days. The company decides when and how much to request for each draw down period. Hedge Funds like LeadDog Capital, LP are usually the types of investors that provide companies Equity Line Financing, which is entered into through a Standby Equity Purchase Agreement.
In an equity line financing, the company will usually rely on the private placement exemption from registration to sell or “put” its common stock to the investor. The company then registers the "resale" of the securities sold in the equity line financing. In this type of funding, the delayed nature of the "puts" and the lack of market risk resulting from the formula price differentiate an equity line financing from PIPEs (private investment, public equity). For this reason the Securities and Exchange Commission (SEC) views private equity line financings as indirect primary offerings.

The SEC recognizes that companies typically prefer to use the "resale" form of registration to register the common stock being sold in these financings. The SEC permits companies to register the "resale" of the common stock prior to its exercise of the "put" if the transactions meet the following conditions:

    - The company must have "completed" the private transaction of all of the securities it is registering for "resale" prior to the filing of the registration statement;
    - The "resale" registration statement must be on the form that the company is eligible to use for a primary offering; and
    - In the prospectus, the investor(s) must be identified as underwriter(s), as well as selling shareholder(s).

Once the shares are registered pursuant to an S-1 or S-3 registration statement, the company can then “put” shares to the investor from time to time, which the investor must purchase pursuant to the terms of the agreement with the company. The amount of funding for each request is based on a on formula that the company and investor have upon in advance and which is disclosed to the public in the registration statement.

Raising capital through a equity line financing is sometimes preferred by companies over a convertible debenture for two main reasons.

First, the company, not the investor is the one that controls when to request capital and sell shares of its common stock pursuant to the equity line. In a convertible debenture funding, although capital is provided to a company up front, if there is no floor on the conversion price it is considered a toxic convertible and can be highly dilutive since the debenture holder can keep converting into the company's common stock and selling into the market.

This selling pressure can hurt a company's stock price and the company may have very little if any control over the selling. If the company does not honor the investors conversions, then the matter usually ends up in court. Courts historically tend to favor the investor who holds the convertible debenture, unless the company can actually prove a breach of contract by the investor. The company would have to prove that the debenture holder was shorting the company's common stock in violation of the debenture terms or securities regulations.

Second, most equity line financing agreements contain terms that allow the company to cancel in the middle of a funding draw down if the price of the common stock falls below an agreed upon "minimum acceptable price". This gives the company significant control over the funding process. It effectively allows the company to stop the funding temporarily, indefinitely or even permanently.

The "minimum acceptable price" can be any price or formula that the company and investor agree upon. It can be a fixed price, but is usually a moving price. For example, the "minimum acceptable price" can be defined as 75% of the volume weighted average price(VWAP) of the company's common stock for the twenty (20) trading days prior to each draw down date. This way if the company's stock price drops suddenly after the company gives a draw down notice, the company can cancel in the middle of the draw down period to take downward selling pressure of its stock price. In this situation the company would only be responsible for issuing shares to the investor up to the date it gives the investor the cancellation notice and the investor would be required to fund that amount up through the date of cancellation.

Although the company must first register the shares of common stock that will be used to draw down funding under the equity line, it can be a useful funding tool for a company because once registered, if the equity line was structured properly, the company can use it to draw down capital over a period of up to three years. Usually a company is able to register up to 30% of the number of shares of common stock it has issued and outstanding at the time it files the registration statement. Factors to be considered include, whether an S-1 or S-3 registration is being used, how many shares are currently in the public float not counting affiliate shares, the relationship between the company and the investor, and is the investor basically acting as a conduit for the company.

Hedge Funds have become good sources for companies looking for capital through an Equity Line Funding. Some companies have raised substantial sums through these funding vehicles. I have drafted many equity line agreements for hedge fund clients over the years and worked with corporate attorneys who have filed the registrations statements for their clients. Small and large companies, as well as non-US companies have raised capital through this funding structure.

Below are examples of some terms found in a typical Equity Line Financing Term Sheet:

Investment Period: The “Investment Period” begins on the effective date of the Registration Statement and continues for a period of twenty-four (24) consecutive months. During the Investment Period, the Company may exercise Puts of up to the maximum Put Amount with an aggregate total not to exceed the Commitment Amount. Prior to the exercise of a Put the Company must have an effective registration statement on file with the SEC registering the resale of the Common Stock.

Put Notice: During the Investment Period, the Company, in its sole discretion, may issue “Put Notices”, subject to the terms of the Standby Equity Purchase Agreement. The Company shall deliver the Put Notices to Investor via facsimile transmission. The Put Notice shall specify (i) the amount of the Put the Company wishes to exercise; and (ii) the beginning and ending dates of the Pricing Period. The Pricing Period will commence on the “Trading Day” following Investor’s receipt of the Put Notice, as long as the Investor receives the Put Notice before 2:00 P.M. New York City time.

Here are some more examples of terms found in an Equity Line Term Sheet.

Here is some additional information on other financing structures.

Private Placement Funding.
Learn more about how companies are accessing Private Placement Funding to fund their capital needs. Also, get information on how to locate funding sources, comply with important regulatory requirements and get tips on how to structure the deal with investors.

Tips on Raising Capital.
One of the most difficult tasks small companies face is raising capital. Get some useful tips that might give you an extra edge on sourcing capital and structuring a transaction with interested investors.

Reverse Merger Funding.
A Reverse Merger, if done properly can provide a fast alternative to going public through a direct listing. It can help a company raise needed funding by providing access to the capital markets. These types of funding transactions have become very popular over the years with hedge funds.

Here is a link to a page on the SEC website regarding guidance and interpretation with regard to Equity Line Financing. It is geared more toward attorneys and covers registration statements, but is still quite helpful.