This article covers:

• The Basics of Capital Raises

• What is a Share Purchase Plan?

• What is a Pro-Rata Entitlement Offer?

• Private or Institutional Offers and Placements

The global economic downturn has brought with it a significant increase in the number of companies raising capital – a process that is referred to as a 'capital raise'.

Since the start of the pandemic, records have been broken, with billions of dollars raised from investors.

The Basics of Capital Raises

Capital raisings come in a variety of different formats.

If you’re new to capital raises, you may want to read our guide on what to consider before participating in a capital raise.

Nonetheless, to participate in a capital raise, you need to be on the shareholder register by the close of business on the record date nominated by the company. Due to T+2 settlement, this means you must have bought the stock before it entered the trading halt where the company announces a capital raise.

In almost all cases, shares issued through a capital raise will be offered at a discount to the last trading price, or at a discount to the volume-weighted price leading up to the offer. Some private placements may be priced at a premium, particularly if a major shareholder is taking a large stake in the company, but this is uncommon.

A capital raise may also be 'underwritten'. This means that a third-party, typically the broker running the deal, or even another institution, will buy any leftover shares where eligible shareholders do not take up the offer. The underwriter ensures the company raises the full amount of funds it is seeking.

With some of these basic details out of the way, here are the main types of capital raises.

What is a Share Purchase Plan?

A Share Purchase Plan (SPP) allows all shareholders to apply for shares at a set price. Applications for new shares under an SPP will be offered in ‘tiers’ according to fixed-dollar values.

For example, the minimum application amount might be $2,500, followed by $5,000, and then in increments of $5,000 up to a maximum of $30,000 per investor.

Share Purchase Plans are often less favourable to retail shareholders. This is because share dilution is more likely due to the possibility the offer is oversubscribed – that is, the amount of new shares applied for exceeds the amount of shares available under the offer.

You can learn more about share dilution here.

Where an SPP is oversubscribed, bids may be scaled back. You may receive less shares than what you applied for due to excess demand. The amount of shares you are allocated has no correlation with the number of shares you already own.

A scaleback is more likely when the SPP is accompanied by an institutional placement, which we’ll detail below. The reason for this is because institutions are often given preference to fund the majority of a capital raise in order to provide ‘stability’ for the stock. That process takes place first, and will often be conducted by issuing shares at a fixed-price, or through a bidding process called a 'bookbuild'.

In some instances, an SPP may include a special pricing clause designed to ‘protect’ retail shareholders from a drop in the company’s share price during the capital raise process. There may be a provision that offers shareholders a small discount in buying new shares if the price of the stock trades below the SPP price. Not all SPP offers include this clause, so read the offer booklet closely.

What is a Pro-Rata Entitlement Offer?

A Pro-Rata Entitlement Offer is a type of capital raise where the amount of shares you are eligible to buy is based on how many you already own. It is a pro-rata calculation. For example, 1 new share for every 5 shares you currently hold (i.e. 1-for-5 offer).

Under an entitlement offer, which is sometimes also referred to as a rights issue, shareholders are entitled to buy a certain amount of shares in the company at a fixed price. Retail investors typically have several weeks to apply for, and receive their shares. The entitlement offer may be conducted on an ‘accelerated’ basis, which effectively means a shorter timeframe.

This type of capital raise allows shareholders to reduce the risks associated with share dilution. Every investor can apply for and receive a quota of shares that is in proportion with their existing ownership.

Shareholders may also have the option to apply for additional shares on top of their entitlement through something called an oversubscription facility. However, there can be no guarantee that such a facility will be available, or that applications are not subject to scaleback, either in part, or in full.

An entitlement offer is often accompanied by an institutional entitlement and/or placement on the same price and pro-rata terms. The only difference is that this component of the capital raise may be subject to a shorter settlement period.

Finally, rights offers may be designated as 'non-renounceable', or 'renounceable'.

In the case of a renounceable offer, you may sell your ‘rights’. This can be done on-market, as if you were trading normal shares. In fact, investors can also buy more rights if they wish.

Renounceable offers are the fairest type of capital raise as individuals have complete flexibility and financial incentive to act in a manner that preserves their best interests. With that said, most entitlements are typically non-renounceable, where rights cannot be traded to another party.

Private or Institutional Offers and Placements

Unfortunately, retail shareholders are excluded from placements. A placement is a private offer for shares to sophisticated or institutional parties. If there is no accompanying Share Purchase Plan, and no Entitlement Offer, retail shareholders will see their holdings in the company diluted.

Placements allow a company to raise capital quickly. Offers involving retail shareholders can take weeks to conclude, while placements can be finalised in days. The company can also save costs associated with the preparation and distribution of the paperwork for the offer.

If the placement is wrapped up quickly, the stock can resume trading earlier than other types of capital raises mentioned above.