Material Adverse Effect

“Material Adverse Effect” means any condition, circumstance, situation or effect on the business, properties, assets, operations, results of operations or financial condition of the Company that is material and adverse to the Company and its Subsidiaries, if any, which taken as a whole, would prohibit or otherwise interfere with the authority or ability of the Company to enter into and perform any of its obligations under this Agreement. This is more than just a definition, it is actually a clause used in an investment agreement between an investor and a company.

Investment contracts for equity line funding as well as standby equity purchase agreements usually contain Material Adverse Effect clauses. The purpose of these clauses is to provide protection to the investor in the event the company they have invested in suffers a decline in the price of their stock because of a Material Adverse Effect. The clause would probably allow for a price reset or some sort of liquidated damages.

Most investors will require some sort of downside protection from the effects of unforeseen events or even foreseen events that could possibly happen, but the investor still feels the investment is worth the risk as long as there is some sort of protection. In addition to price resets and liquidated damages, the investor may ask for additional common stock, which would have the effect of lowering the investor’s average price paid per each share of common stock. These clauses are commonly used and most companies are receptive to their use as long as the penalty or damages are so onerous that it would cause more harm to the company than the actual event that causes the penalty or damages to be incurred in favor of the investor.

Here is some additional information on other financing structures with Material Adverse Effect clauses.

Private Placement Funding.
Information on accessing Private Placement Funding to fund capital needs. How to locate investors and other funding sources, comply with applicable regulatory requirements and get tips on deal strucutre.

Tips on Raising Capital.
Raising capital is one of the most difficult tasks facing management. Here are some useful tips 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.