EQUITY LINE

EQUITY LINE - This is a form of financing structure used mainly by hedge funds to finance microcap companies looking to raise capital to execute their business models. The funding can be used by companies for growth capital, acquisitions, paying down debt, to purchase equipment or any other legitimate use the company may make of its capital. As you can see, the definition is very broad.

The way that it works, is that the company must first register shares of stock with the U.S. Securities and Exchange Commission (SEC). Once the shares are registered with the SEC, the company then has the discretion to "draw down" funding amounts usually based on a specific formula. The formula is usually based on the trading volume and share price of the company's common stock.

Equity Line Funding has been used by many companies in the past and continues to be used today. They have been used for funding companies usually in the range of $10,000,000 to $100,000,000, although a company will typically set up a larger line than they need.

One of the benefits of this funding structure is that the company has control over the timing of when to draw down the capital. Some of the terms and conditions used to further give the company control over the amounts it draws down include agreed upon discounts based on closing bid prices, cancellation notices and control over when the draw down notices are given (which can only be given by the company).

Hedge Funds have become very good sources of capital financing through equity lines and companies have raised substantial sums through equity lines over the years. I have drafted many documents for hedge fund clients over the years for these types of funding structures. Small and large companies, as well as non-US companies have raised capital through this funding structure.

Hedge Funds like LeadDog Capital, LP are usually the types of investors that provide companies Equity Line Funding, which is also sometimes referred to as a Standby Equity Purchase Agreement.


Give me a call if you have any questions regarding terms, structuring or the mechanics of how these funding vehicles work. A little extra information on deal terms and structure can go a long way. Make sure your management team examines all the funding options that are available.
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One thing to keep in mind if you are a company looking to set up this funding structure is that most small companies are in a constant search of funding for working capital, to fund growth or make an acquisition. It is sometimes better to have a funding structure like this in place so it is available when you need it.

Here is some additional information on other financing structures