EFFs – Equity Finance Facility

I noticed that FJET (Fastjet) has recently been involved in EFFs, or “Equity Finance Facilities”. What are they, and what do they imply?

The basic gist seems to be, from what I can gather, is that a company C is in need of finance. Suppose an fund F exists to provide an EFF. Instead of a placing shares, C will arrange a facility with F, up to a certain value. C may then “draw down” on that facility as it needs it, until the facility is exhausted. It issues shares to F, who then pay a calculated price. The price seems to relate to the share price in force at the time of the drawdown. I’m not clear on how F makes its money, as it seems to take the shares at a slight premium to the market. Coupled with the fact that the share issue is dilutive, I’m puzzled as why F grants the facility. There’s obviously some wrinkle I’m missing here. Anyone care to fill me in?

The touted benefits of the scheme to C is that it can utilise the facilities as needed, and doesn’t need to pay for anything that it doesn’t need. Sounds fantastic, right? The trouble is, I’ve Googled around for companies that have used EFFs, and they appear to have been HIGHLY TOXIC to the share price over the long term.

What follows is not a hand-picked selection of shares carefully chosen to prove whatever it is I wanted to prove, but a set of companies that I have taken as I have seen them.

NASDAQ:MVIS – MicroVision
On 13 Sep 2011, MVIS secured a $35m committed equity financing facility from Azimuth opportunity (http://is.gd/YETGRs). The news seemed to have caused a minor spike in the share price, as presumably investors were excited about the facility. On 16 Sep 2011. the share price was $7.679. It is now $2.37. Ouch!

Continuing on …

NASDAQ:DSCO – Discovery Labs
On 14 Jun 2010, DSCO secures new committed equity financing facility with Kingsbridge Capital for up to $35m (is $35m some kind of magic facility figure here??). In this case, that actually sent the share price down, and on 18 Jun 2010, the share price stood at $3.66. It is now $1.69. Are we spotting a pattern yet?

On 7 Dec 2009, Octus secures $5m reserve equity financing funding with AGS Capital (http://is.gd/Y590iC). Share price on 18 Dec 2009: 0.175. Share price now: 0.0111.

LON:SER – Sefton Resources
Closer to home this time, on 14 May 2012, SER announced a £2m oversubscribed placing, and £10m equity financing facility
(http://is.gd/qA95Gm). Share price on 18 may 2012: 1.75p. Share price now: 0.514p

I HAVE FOUND NO INSTANCES OF COMPANIES WHERE SHAREHOLDERS HAVE ACTUALLY BENEFITTED FROM EFFs – THEY’VE ALL LOST. Admittedly, I’ve only done a casual search, but there’s a clear message here. If anyone can fill in some of the substance on EFFs, and highlight their particular dangers, or know of any EFF which has been ultimately beneficial to the shareholders, then let me know.

I’m afraid that this looks really bad for FJET.

Edit: Thanks to MrContrarian and his blog “Cheapskate”, for his post on “Equity death spirals – aka Standby Equity Distribution Agreement (SEDA)”. Also, please read the comments section, which explains the mechanics of the EFF.


About mcturra2000

Computer programmer living in Scotland.
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2 Responses to EFFs – Equity Finance Facility

  1. marben100 says:

    Hi McTurra,
    I can answer your question on how the EFF providers make their money. Firstly, if you investigate more deeply, I think you’ll find that the shares are NOT issued at a premium to the prevailing share price. Looking at FJET’s EFF it simply says the price will be set “with reference to the average of the three lowest Closing Bid Prices in the period following”. Looking at FJET’s announcement on 14th June, whilst the price FOLLOWING the announcement was below the subscription price, the price preceding it was not.

    Nighthawk Energy entered into an EFF in 2010. At Nighthawk’s AGM a couple of years ago I asked whether the EFF provider sold shares short into the market, ahead of the subscription notice. I was was told, no – they sold the shares “forward”! I.E. yes – the shares were sold short into the market (at a price above the subscription price) and then the shares were issued to Darwin, covering the short position. So, Darwin takes no risks and makes its money from the difference between the price it sells the shares at and the subscription price. I think you will find that in all cases, the share price for a period prior to the subscription is higher than the subscription price.

    In the case of Nighthawk, I filed a market abuse complaint with the FSA, as price sensitive information, resulting in major writedowns of Nighthawk’s assets was released soon after the EFF drawdown. NB Nighthawk is now under new management (& ownership) and does now seem to be creating shareholder value.

  2. mcturra2000 says:

    Here’s another one I found:

    Cytokinetics Secures $75 Million Committed Equity Financing Facility (http://is.gd/tCmOCy)
    That happened on 28 Oct 2005. The share price stood at $42.12. It is now $10.79. Yet another disappointment.

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