EQUITY LINE FUNDING

Equity Line Funding - is a funding structure that has been used by hedge funds for the past ten years or so to provide funding to small and large companies looking to raise capital. It can be used by small or large companies and can be used in the United States, Asia, Europe and Australia. Its use has been widespread and seems to be growing, especially for companies listed on the Frankfurt Stock Exchange.

Private Funds often provide companies Equity Line Funding as part of a Frankfurt Stock Exchange Listing. No registration statement is required for Frankfurt listed companies and the shares are free trading. This can make it easier for companies to raise capital in a shorter time frame and with less cost.

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. This type of funding structure is also referred to as a Standby Equity Purchase Agreement or SEPA.

Give me, Joseph LaRocco a call if your company (US, Europe, South America, Asia listed companies) is looking for capital in the form of an Equity Line Funding structure. I can answer your questions regarding terms or the structuring of a transaction. Make sure that your management team has the information it needs regarding equity line funding and the mechanics of how this financing structure works. Contact Joseph LaRocco

ALSO, please feel free to contact me regarding FSE Listings as well, because an equity line funding can help fund your company once it has completed a Frankfurt Stock Exchange Listing.

The way the Equity Line Funding works in the United States, is that the company registers shares of its common stock with the U.S. Securities & Exchange Commission (SEC). Once the shares are registered pursuant to an S-1 or S-3 registration statement, the company can then "draw down" by sending a funding notice to the investor. The amount of funding for each request is based on a specified formula that the company and investor agree upon in advance and which is disclosed to the public in the registration statement.

I recently came up with another way for companies to maximize the amount of funding they can draw down in a pricing period. It is a bilateral pricing structure that allows companies to draw down more funding than the typical funding structure used by hedge funds today. The Justified BiLateral Clause or JBL Clause increases the amount of funding beyond the $200,000 limit used by most funds based on the number of shares issued as the commitment fee.

Equity line funding is also being used by companies to raise working capital, to make acquisitions or to pay down debt. The funding structure is based on a formula which is used to determine the amount of funding the company will receive at the end of the pricing period.

Most hedge funds restrict company's to 5 day pricing periods and limits of $200,000 per pricing period which limits the risk to the hedge fund. The funding terms are based on a discount to the Volume Weighted Average Price (VWAP) as reported by Bloomberg.I tend to go with 10 or 15 day trading days for pricing periods because it allows the company to draw down more funding.

One of the main benefits of equity line funding is that the company has control over the timing of draw downs, which is one of the benefits of using an equity line. A number of terms and conditions are used to give the company additional control over the draws down. They include the following:
- agreed upon discounts based on closing bid prices of the company's common stock;
- the company chooses its own floor price below which shares cannot be sold during the applicable draw down period selected by the company;
- the company controls the amount requested in 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 an equity line funding, also known as a Standby Equity Purchase Agreement or SEPA 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 for the SEPA. Some investors even call it an equity line facility.

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

Firstly, pursuant to the terms of an equity line funding the company is the one that controls when to request capital and sell shares of its common stock. Even more importantly, with an equity line the company selects its own floor price. In a convertible debenture financing, although capital is provided to a company up front, if there is no floor on the conversion price it becomes a toxic convertible also known as a death spiral. This form of funding can be highly dilutive since the debenture holder can keep converting into the company's common stock and selling into the market with no floor price to protect the company and that is why equity line funding would be a preferred form of funding.

This downward pressure or selling pressure can hurt a company's stock price and the company may have very little if any control over the situation since it must honor the conversions. If the company halts the conversions by refusing to issue common stock to the investor, then the matter usually ends up in litigation. Courts tend to favor the debenture holder/investor in these situations unless the company can actually prove a breach of contract by the investor. For instance, the company would have to prove that the debenture holder/investor was shorting the company's common stock in violation of the debenture terms or securities regulations.

Secondly, most equity line funding agreements contain a provision that allows the company to cancel in the middle of a funding draw down or not count certain trading days 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 if its stock price is trading below the agreed upon minimum price. A good structure allows the company to name its minimum price for each time it request to draw down funding. I have drafted many of these clauses for corporate funding.

The "minimum acceptable price" can be any price or formula that the company and investor agree upon. It can be a fixed price or a moving price which is more common. For instance, the "Minimum acceptable price" can be defined as 80% of the volume weighted average price (VWAP) of the company's common stock for the fifteen (15) trading days prior to each draw down date. This way if the company's stock price starts dropping rapidly after the draw down is given, the company can cancel in the middle of the draw down period. This way, the company would only be responsible for issuing shares to the investor up to the cancellation date and the investor would be required to fund that amount through the cancellation date.

One of the best uses a company can make of an equity line funding is to make an acquisition. Whether it is an asset purchase or a corporate acquisition of a competitor, if it provides cash flow and increases net income it is usually a good move for the company. Of course, price terms must be favorable to the company so that it is not over paying for the acquisition. Some private companies in the United States and Australia are even using equity line funding to get a pre-listing commitment in advance of a reverse merger or direct listing.

Simply using an equity line to pay down debt or for working capital is generally not a good idea unless it will have the effect of increasing the company's net income. Otherwise, it will simply dilute the company and the percentage of ownership interests of all its existing shareholders. Also, if the capital that is raised is not used effectively by the company, then it will have the effect of putting downward pressure on the stock price causing it to trade lower.

Although company's listed in the United States must first register the shares of common stock that will be used to draw down funding under the equity line, this is not required of companies listed on the Frankfurt Stock Exchange 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 two or even three years in some cases. Depending on certain factors, a company might be 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 actually in the public float not counting affiliate shares, the relationship between the company and the investor, is the investor simply acting as a conduit for the company and if the offering is viewed as a primary or secondary offering.

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.

Joseph LaRocco is a Director of Equity Partners Fund SPC and has been assisting companies with various equity line funding mstructures to support then with their long term funding needs. Companies that are publicly traded are required to file their financial reports on the Securities and Exchange Commission ( SEC ) and keep their financial statements current. The SEC always monitors these companies for fraud, fraudulent conduct and penny stock scams.

Below are examples of some terms found in a typical Equity Line Funding 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.

Put Amount: The amount the Company shall be entitled to request in each Put Notice (“Put Amount”) shall be that dollar amount equal to a minimum of $5,000 and a maximum of $200,000 per pricing period.

Price Per Share: The price per share paid by Investor (the “Purchase Price”) on any particular day shall be equal to ____% of the “Market Price”. The Market Price shall be equal to the lowest daily volume weighted average price (“VWAP”) of the Common Stock on the Principal Market during the Pricing Period.

Pricing Period and Settlement:

(i) The pricing period (“Pricing Period”) will consist of the five (5) consecutive Trading Days immediately following the Trading Day the Put Notice is received by the investor.

(ii) There will be a minimum of three (3) Trading Days between Put Notices.

(iii) The number of shares of Common Stock being purchased and the aggregate Purchase Price shall be calculated at the end of the fifth (5th) Trading Day of each Pricing Period (each a “Settlement Date”).

(iv) Only one Put shall be allowed in each Pricing Period. At no time shall Investor be required to purchase more than the requested Put Amount for a given Pricing Period.

Aggregate Purchase Price: For each Pricing Period, Investor shall be required to pay not less than the “Aggregate Purchase Price”, which amount shall equal the lesser of:

(i) That amount equal to 15% of the aggregate daily U.S. trading volume (excluding block trades of 50,000 or more) during the Pricing Period times the Purchase Price; or

(ii) The amount stated in the Put Notice.

Here is some additional information on other financing structures