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Replies to post #4154 on Business Warrior Corp (BZWR)
Equity Line – Pros and Cons
Equity Lines have several positive attributes for both issuers and investors.
First, an interesting point of clarification about the term “Equity Line”. Within the securities industry, the Equity Line has been known for years as an “Equity Line of Credit”, however, that is a confusing misnomer as there is no “credit” involved and the Equity Line is not a debt instrument. Unlike debt, an Equity Line does not charge interest and the funds received through the Equity Line do not have to be repaid. However, much like a traditional line of credit provided by a bank or asset-based lender allows a company to carry accounts receivable and inventory, an Equity Line allows a public company to “draw” against its equity on a periodic basis by selling registered shares of common stock to an investor for cash. For this reason, just as every company should consider a bank line of credit to support its operations and working capital needs, every public company should consider an Equity Line as a potential source of funding that can be accessed if and when needed.
For issuers, an Equity Line can provide a reasonably reliable, steady stream of cash that can be used to fund ongoing working capital needs. Equity Lines usually offer less dilution and a lower cost of capital to issuers than other forms of investment. And, unlike secured debt instruments such as convertible debentures, Equity Lines do not have any security interests in the assets of the issuing company so there are no lien filings. Additionally, Equity Lines often are structured in a manner that give issuers the control over the timing and amount of shares that are sold to the investor, allowing issuers to determine when capital is raised and at what price.
For investors, an Equity Line provides a lower risk approach to investing, as registered shares are purchased in tranches over time at a pre-determined discount to market. This gives investors the ability to dollar cost average their investments over time rather than gambling on the purchase price associated with a one-time investment.
For all of the positive factors associated with Equity Lines, there are a few negative considerations for issuers. First, issuers do not receive all of the capital at once, therefore, an equity line typically is not a viable source of financing for an acquisition or other use of capital that requires a large one-time infusion. Second, the shares to be sold to the investor must be registered by filing and going effective with an S-1 registration statement (S-3 if the issuer is exchange-listed), which involves additional legal fees and a time delay in receiving the capital.
In years past, some providers of Equity Lines earned a tarnished reputation, casting a negative view toward Equity Lines that still exists today. These investors, often formed as off-shore entities, were known for mandating usage and taking the control of the instrument away from issuers. They also did not allow issuers to establish a mechanism for price protection via a threshold or floor price. In some cases, Equity Lines were set up for issuers that had minimal operations and little to no trading volume, giving the market the impression that Equity Line structures were a “financing of last resort.” This perspective has changed as exchange-listed companies – ranging from NYSE to Nasdaq and NYSE Amex – have established Equity Lines as a viable source of capital, as have substantial companies that trade on the OTC Bulletin Board.
AI
