Standby Equity Distribution Agreements (SEDAs)
Another financing vehicle is being utilized by small-cap healthcare companies: the Standby Equity Distribution Agreement (SEDA). This relatively new “mechanism” is another … alternative to the traditional PIPE, Registered Direct Offering (RDO) or secondary offering to assist small publicly-traded companies raise additional capital by selling new stock without making a formal market offering.
Under a SEDA, a financial (I-Bank, hedge fund or an specialty sub-fund) entity agrees to “privately” purchase a defined number of shares to be offered in specified lots over a specific period. The purchaser gets the stock at a discount to the current market price (usually up to 5 %) as the SEDA format usually specifies a maximum stock price which an investor agrees to pay,
- This mechanism is “controlled” by the company as opposed to the investor. Companies can “ask” buyer to buy shares at any time, regardless of market conditions. The timing of sales is under the control of the company (not longer than 2 years), so it can sell when it believes its share price is high,
- Companies have the “right” to sell shares and buyer has the obligation to buy shares to match unique financial needs. SEDAs can be executed in virtually all market conditions as companies can set a minimum acceptable price and raise capital for fewer shares over a period of price strength. Shares are issued as determined with no uncertainty regarding dilution. This significantly lowers cost with no non-usage fees. Companies can take instant advantage of a favorable stock price / chart with reduced time to market compared with other forms of financing,
- Once the SEDA has been registered with the SEC and is positioned for a periods of price strength; it behooves subscribing companies to executing a draw down in favorable market windows to raise capital given the much longer time it takes to organize a PIPE, RDO or secondary offering.
Bottom-line: SEDAs provide companies with the right but “not” the obligation to draw down on the facility. In contrast to a traditional secondary, the company would be able to raise capital at timed intervals depending on market pricing in the future, at prices the company deems appropriate. If the company does not need funds, it can elect not to sell any shares at all or to sell only a part of the maximum.
Recent usage includes: ARRY, ACHN, AHN and PHGUF.PK .