PGI Energy, Inc. (PGIE)

[TradingGems]

Here is a detailed explination of the type of funding PGI Energy (TSAS) currently has a commitment for explained by Joseph B. LaRocco of LeadDog Capital:

Standby Equity Purchase Agreement
Standby Equity Purchase Agreement - is an agreement entered into by a public company and an investor, usually a hedge fund, by which the company “puts” shares of its common stock to the investor and the investor must purchase the shares. The Standby Equity Purchase Agreement or SEPA has been used by small and large companies and its use seems to be growing in Asia, Europe and Australia.

One of the benefits a company has with a SEPA, also known as an equity line, over other traditional funding options is that the company controls the timing of draw downs. Various terms and conditions used by companies to give them additional control over the draw down process include:

- the company controls when the draw down notices are given (which can only be given by the company);
- the company controls the amount of each draw down;
- agreed upon discounts based on the VWAP of the company's shares; and
- the company sets a floor price for each draw down.


Some companies use a Standby Equity Purchase Agreement for equity line funding to have it in place when they need capital. It has also been used in many countries outside of the United States. Raising capital through an equity line is sometimes preferred by companies over a toxic convertible for essentially two main reasons.

First, under the terms of a Standby Equity Purchase Agreement the company controls when to request funding and sell shares of its common stock to the investor. In a convertible financing structure capital is provided to a company prior to the registration statement being filed, but if there is no floor on the conversion price it becomes a toxic convertible and can be highly dilutive. The problem with this type of structure is that the debenture holder can keep converting into the company's common stock and selling which can push the stock price down.

The company may have very little control over the situation since it must issue common stock to satisfy the conversions. If the company refuses to issue common stock pursuant to the conversion terms, then the parties usually end up in court. Courts tend to favor the investor in these situations unless the company can actually prove a breach by the investor or that the investor shorted the company's common stock in violation of the terms of the agreement.

Second, most Standby Equity Purchase Agreements contain a provision that allows the company to withdraw its funding request in the middle of a draw down if the price of the common stock falls below a "Minimum Acceptable Price". This gives the company greater control over the funding process by allowing the company to halt funding temporarily or permanently.

The "Minimum Acceptable Price" can be a set price or a formula that the parties agree upon in advance. Although it can be a fixed price, a moving price is more commonly favored. For example, the "Minimum Acceptable Price" can be defined as 75 % of the volume weighted average price(VWAP) of the company's common stock for the ten (10) trading days immediately prior to each draw down date. This allows the company to set a floor price for each draw down period to protect its stock price if it starts dropping after the draw down notice is given. The company is still responsible for issuing shares to the investor above the Minimum Acceptable Price, but it gives the Company greater control over the funding process.

The way the SEPA works in the United States, is that the company seeking funding is required to register shares of its common stock by filing an S-1 or S-3 registration statement with the U.S. Securities & Exchange Commission (SEC). Once the registration statement is declared effective by the SEC, the company can then "draw down" by sending draw down notices to the investor. The amount of funding for each draw down request is based on an agreed upon formula that the company and investor agree upon in advance.

The formula is based on the company’s share price and trading volume during the draw down period, which is usually five trading days. The company in its sole discretion determines when and how much to request for each draw down. Hedge Funds investors like LeadDog Capital, LP usually provide companies funding opportunities through a Standby Equity Purchase Agreement.

US and Canadian listed companies must first register their shares of common stock that will be used to draw down funding under the equity line facility. Although this involves time and expense, the SEPA can still be a very useful funding tool for a company because once registered, if the equity line facility was structured properly, the company can use it to draw down capital over a period of two or even three years in some cases. Depending on certain factors, a company might be able to register up to 30% of the number of shares of common stock it has issued and outstanding at the time it files the registration statement.

Factors to be considered include, whether a Form S-1 or Form S-3 registration is being used, how many shares are actually in the public float not counting affiliate shares, the relationship between the company and the investor, is the investor simply acting as a conduit for the company and if the offering is viewed as a primary or secondary offering.

Source: http://www.angel-and-venture-capital-guide.com/standby-equity-purchase-agreement.html



If you have any questions or need clarification on any of this, please don't hesitate to ask and I'll respond when I can. Or, you can make direct contact to Mr. LaRocco. From the above website:

"If you have any Comments on this Website I would be glad to hear from you. If you need some legal advice regarding negotiating terms with an investor or reviewing funding documentation give me a call. Also, if you need help drafting a Term Sheet for interested investors, analyzing a Term Sheet or discussing various Financing Structures give me a call."
Joseph B. LaRocco 203-599-1928



Best,
TG