08/14/2009 | By Richard Ainsberg
By Richard Ainsberg – Twenty-First Securities
Need to raise capital? Take a close look at what a state-of-the-art Dividend Reinvestment (DRIP) and Direct Stock Purchase Plan ("DSPP") with a Waiver Feature can do for your company.
The first DRIP appeared in 1973 - AT&T was the first household name to offer one. These programs gave shareholders the ability to reinvest dividends in lieu of receiving cash. Later, the DSPP optional cash component was added which allowed both shareholders to purchase small sums of stock directly from the company (usually $500 - $10,000 monthly), and a first time shareholder to purchase stock directly from the company. More than 1,000 US companies offer these simple – plain vanilla Plans today.
The Direct Stock Purchase Plan component of these Plans evolved 20 years ago to include the Waiver Feature. The Waiver Feature allows a company to accept, at its discretion, from shareholders or new investors, large sums of capital - essentially "waiving" the maximum limit stated in a traditional plan. This allows the company to, in turn, issue shares of stock at a slight discount to the market price.
The Waiver Feature has become an invaluable capital-raising tool to corporate management. Equity is now being raised without a road show, formal announcement or third party underwriter. Best of all, a company maintains full control as to who their investors are and the amount of their investment. The reason this method is not more widely known is attributed to the fact that disclosure of capital raised is limited to a footnote in the 10Q.
In this re-equitization environment with shares trading at a discount to the value of the underlying assets, issuing stock now through a traditional method may not be very attractive for a variety of reasons, including the persistent overhang that exists. Issuing stock, however, through a DSPP on a periodic basis, may be very attractive because of the ability to dollar-average and at the same time only issue above a certain pre-determined threshold (floor) price. Steve Marks, head of Fitch's REIT group recently indicated, "most REITs will need to address tenuous access to financing across the capital markets".
At a time when REITs are searching for liquidity, the answer may be at their fingertips - with the addition of a couple of additional paragraphs – to Plans that already exist.
The Waiver Feature is an alternative mechanism used by companies to economically raise capital, if and when they choose to do so. In order to accomplish this, the company must offer a slight "incentive discount". The Waiver Feature has been designed to provide maximum flexibility so that the issuer can:
- Vary the discount from one month to another - which determines the "total cost" of issuance;
- Decide how much in the aggregate to accept and choose the participants and how much they can invest, thus controlling the inflow of new capital;
- Incorporate pricing mechanisms (a threshold price provision) so that stock will not be issued below a certain price; and
- Set a "pricing period" (days on which the stock is valued) of any duration during any time of the month to take advantage of dollar-price averaging, and thus eliminate the need to issue shares at a price based on a single point in time,
Each month, a company determines whether there is a need to raise capital. If the decision is to do so, the discount rate, threshold price, and pricing period are set. This information is then communicated to interested shareholders/investors via a taped message or directly from a designated person at the company from a telephone number printed in the S-3 prospectus. Recently, companies have utilized their Web site to notify shareholders of plan-related information. Based on the information obtained, an interested participant will submit a "Request for Waiver Form" indicating a dollar
amount – which the company can accept, reject or modify.
It is important to remember these plans are flexible; they can be turned on and off from month to month as capital-raising needs and general market conditions change. If a company decides to raise capital because there is a need and the stock price is strong, it may do so. If in the following month there is less of a need or the stock price has become less attractive, the plan can be shut off simply by indicating that the company is not accepting waivers.
An integral control component of the Waiver Feature is the threshold price provision. This allows the issuer to set a minimum price at which they will issue stock each month. During that month's pricing period, if the stock price (VWAP – volume weighted average price) is at or above this established price, stock will be issued each day. If the stock price is below this set price, no stock will be issued on that day, and a ratable amount of the shareholder's subscription will be returned. Each month the company can establish a new threshold price based on current market conditions and whether it is interested in raising capital. At no time will the company issue stock below the threshold price minus the discount.
At the conclusion of the pricing period, the transfer agent will issue the discounted shares to the participant and release the utilized funds to the company and any un-invested funds back to the waiver participant.
Despite their flexibility and minimal cost, these plans do have limitations. The amount of capital a company can raise without major market disruption is proportionate to its market capitalization and trading volume.
Initiating or updating a plan is simple and quick. Transfer agents have "waiver" documents readily available and the expertise and experience of having administered these plans for many years. Potential investors monitor plan filings and features, so once a plan is in place, companies find the participant universe is ready, with demand typically outweighing supply.
In an ever-changing global economy that has made conventional financing a challenge, the Waiver Feature in a DSPP is an important reliable alternative source of equity funds.
If a company wishes to raise capital quietly, efficiently, economically -- and, most importantly, opportunistically – while taking advantage of dollar-price averaging and maintaining shareholder benefit, the Waiver Feature of a DSPP is the solution.
Richard Ainsberg is a managing director of Twenty-First Securities Corporation and can be contacted at firstname.lastname@example.org .