So you’ve seen that a company you’ve been following is offering a share purchase plan (SPP). What does that mean?
In short, it’s a way a company can try and raise money by allowing shareholders to buy up to $15,000 worth of shares each without the need to always issue a prospectus.
Not to be confused with a Rights Issue which allows existing shareholders to purchase new shares on a pro rata basis where shareholders can purchase new shares in proportion to their current holding.
The intention behind the share purchase plan is to allow shareholders buying opportunities outside normal trading, and to access the type of discounts normally reserved for big, institutional investors.
Quite often, share purchase plans are offered to shareholders at the same time as companies issue a placement to institutional investors, meaning that smaller shareholders don’t miss out on the action. It also provides the opportunity to combat any dilution that is a result of the placement and issue of new shares.
As a successful share purchase plan will also result in more shares being on the market, the price of those shares will go down as the demand/supply curve shifts.
It’s why share purchase plans are normally offered at a discount.
In most cases the discount will reflect a similar discount that was offered under the placement. Commonly, this is either a discount to the closing price on the previous trading day or a 30-day weighted average.
Because they’re offered to existing shareholders only, it’s also a nice way to reward shareholders who have held the company for a specific amount of time.
So, what does this look like in practice?
Let’s say a company needs an extra $1 million in order to beef up its production and inventory.
The board and management will weigh up their options for getting extra cash — canvassing options such as taking out a loan or looking for investment from a large player.
But they notice that they have a pool of shareholders waiting for an opportunity to buy into the company, but because the company has been doing well, they haven’t found a lot of sellers on the market.
So it’s decided that the company will offer a share purchase plan.
For this example, let’s assume the company has 100 retail investors.
If all shareholders took up an offer to buy $15,000 worth of shares, the company would raise $1.5 million — leading the offer to be oversubscribed.
In this case, the company would scale back its offer — meaning that while it would still receive the $1 million, each shareholder would only get $10,000 worth of shares.
The reality is though, that not all shareholders will want to take the opportunity to snap up $15,000 in shares.
Participation isn’t mandatory, so people can just opt out altogether.
If not enough shareholders apply, the offer may not go ahead.
What’s the difference between a renounceable and a non-renounceable offer?
Shareholders can sell on their rights to purchase shares in the company, but only if the offer is renounceable (although this is rare).
For example, a shareholder may decide that they don’t want to participate in the offer — but another shareholder may want to buy $30,000 worth of shares.
The former can effectively sell their rights to the latter.
On the flip-side, the company may offer a non-renounceable offer — meaning a shareholder cannot on-sell the rights (this is the norm).
Is a share purchase plan a good thing?
For the company there is no guarantee that a share purchase plan will deliver the funds. This is why they are most commonly undertaken following a placement that has secured the funds required.
If the SPP is underwritten, a broker will fund any shortfall that is a result of shareholders not taking up their entitlement – in this case the full amount will therefore be raised.
However, for a shareholder, the SPP provides the opportunity to further invest and maintain their percentage holding in the company following the dilutionary effect from the placement.
It seeks to eliminate any disadvantage to the smaller retail investor following a placement.
Any additional capital raised from the SPP is likely an additional benefit for the company.
Importantly, a share purchase plan only offers the right to buy more shares — it isn’t mandatory and whether you take up the offer is up to you.
This content does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.
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