One of the methods companies use to raise capital is through what they call Share purchase plan or the famous (SPP). Share purchase plans allows the company to issue new shares to each of existing shareholders. The company normally offers these shares at discounted price.
The major benefit for the company is to get to raise capital quickly and the main benefit for the shareholders, they get to buy at discounted price and avoid paying brokerage cost.
First thing you need to check is whether the company’s SPP price is below the current market price, if so, great, you can make money by selling it straight way by selling them once it is released on open market.
You can also choose by just increase your holdings of the company by simply accumulating the stock, to do so, you need to ask yourself whether you should or you want more shares for the long term.
Another option you have, if you decided not to increase your holdings if the offer is a renounceable right issue, you can sell your right to buy shares on the market or on the other hand you could simply sell the stock and buy back the shares cheaply by SPP, hence making the difference between the between the offer price and the market price. However, you got to be careful on this option because if the offer is over subscribed the company can issue less than expected number of shares and even giving you a refund. SPP in this case is less favorable to shareholders as dilution is more likely due to the possibility of over subscription.
Key points to take a look on SPP.
- If the share price is trending unfavorably, you may can lose money.
- If the share price moves up, your profit will increase.
- You will end up with a smaller shareholding of the company if SPP is oversubscribed, in the event you sell in open market to enter in the same position by SPP.
- Make sure the SPP has significant difference between the market price and the offer price to make this transaction worthy.
- In some cases, SPP may include a special pricing clause designed to “PROTECT” the shareholder from fluctuation in the company’s share price during the longer capital raise process, this is VERY IMPORTANT term and ensures the quality of the SPP according to our view. Note that not all SPP offers includes this clause, so make sure you read the offer booklet with attention.