Share Purchase Plans: Here’s everything you need to know
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So you’ve seen that your ASX stock is offering a share purchase plan (SPP). What is involved, when do companies opt for them and are they a good thing?
Stockhead’s guide to Share Purchase Plans on the ASX recaps everything you need to know about this method of capital raising.
In short, it’s a way an ASX stock can try and raise money by allowing shareholders to buy up to $30,000 worth of shares each without the need to always issue a prospectus.
This is different to a Rights Issue which also allows existing shareholders to purchase new shares but on a pro rata basis – in proportion to their current holding.
Quite often, share purchase plans are offered to ASX shareholders at the same time as companies issue a placement to institutional investors, meaning that smaller shareholders don’t miss out on the action.
The intention behind the share purchase plan is to allow shareholders buying opportunities outside normal trading, and to access the type of discounts normally reserved for big, institutional investors.
It also provides the opportunity to combat any dilution resulting from the placement and issue of new shares.
As a successful share purchase plan will also result in more ASX shares being on the market, the price of those shares will go down as the demand/supply curve shifts.
It’s why share purchase plans are normally offered at a discount.
In most cases the discount will reflect a similar discount that was offered under the placement. Commonly, this is either a discount to the closing price on the previous trading day or a 30-day weighted average.
Because they’re offered to existing shareholders only, it also rewards shareholders who have held shares over the long term.
For this example, let’s look at a hypothetical ASX company that has 1000 retail investors and wants to raise $6 million.
If all shareholders took up an offer to buy $30,000 worth of shares, the company would raise $30 million — leading the offer to be oversubscribed.
In this case, the company would scale back its offer — meaning that while it would still receive $6 million, each shareholder would only get $5,000 worth of shares.
The reality is though, not all shareholders will want to take the opportunity to snap up $30,000 in shares. Participation isn’t mandatory, so people can just opt out altogether.
If not enough shareholders apply, the offer may not go ahead and people who invested will be refunded.
It depends dependent on the company’s individual circumstances and even then, not everyone will be in the same boat.
For the company there is no guarantee that a share purchase plan will deliver the funds. This is why they are most commonly undertaken following a successful placement.
For example Qantas (ASX:QAN) raised just over $70 million from its Share Purchase Plan last year when it intended to raise $500 million.
However it had already raised over $1.3 billion in a placement as well as further debt finance.
If the SPP is underwritten, a broker will make up any shortfall consequential from shareholders not participating. In this case the full amount will still be raised.
However, for a shareholder, the SPP provides the opportunity to further invest and maintain their percentage holding in the company following the dilutionary effect from the placement – a significant gripe retail investors often have about institutional placements.
It seeks to eliminate any disadvantage to the smaller retail investor following a placement.
Any additional capital raised from the SPP is likely an additional benefit for the company.
Importantly, a share purchase plan only offers the right to buy more shares. It isn’t mandatory and whether you take up the offer is up to you.