I thought I’d get away from the mechanics that show the flexibility and effectiveness of this program to use an example of how a company would use the program.
Imagine a tech company based in Singapore that works all over the world. They are a small, profitable public company on the main Singapore Stock Exchange. They see an opportunity to grow by engaging in a new market to sell their products and services, that market being India. The company needs $$ to advertise, market, open an office and put feet on the ground in the new market so it can bring in new business. Like many market expansions, the payback and profit wouldn’t be right away. In fact, their own analysis says it will probably take 3-4 years before all the upfront costs are absorbed and profit and positive cash flow generated from this market. Singapore participates in DTCC so their shares can qualify for our program.
The options for this company currently include:
1) Bank loan
2) Private Equity Investment called a PIPE
3) Secondary Stock Offering
4) Loan on Securities
Option 1 is out since if that was a possibility they would have done so already. Options 2 and 3 are 2 methods that work but do the same thing, reduce the current shareholders (that usually include upper management) percentage of ownership through dilution.
Option 4 does none of these and allows both the CEO and CFO (both of whom are major shareholders in the company) to pledge their shares in return for the funds required for the project. The lack of reduction of equity stake is especially attractive since the CEO and CFO are on the inside of the firm and believe this new market can increase the stock’s value by 50-200% over the next 4-5 yrs. They are in position to execute the growth program and believe in their abilities and the future growth prospects of the company.
Stu
