Flexible Capital for Publicly Traded Companies: Understanding Standby Equity Distribution Agreements (SEDAs)
Standby Equity Distribution Agreement (SEDA) is a private placement agreement between a publicly traded company and a financial entity that offers a flexible way of raising capital. Unlike traditional debt financing, SEDA is done through equity, allowing companies to customize their capital and risk management approach. In this article, we'll delve into SEDA and explain how it works.
In a SEDA contract, a publicly traded company arranges to raise additional capital by selling new stocks without making a public seasoned equity offering. The financial entity agrees to privately purchase a defined maximum of shares offered in specified lots (tranches) over a specified period. The purchaser gets the stock at a discount to the current market price, often around 5 percent, and the SEDA usually specifies a maximum stock price that the purchaser agrees to pay.
The beauty of SEDA is that the timing of stock sales is under the control of the company. This allows companies to sell shares when they believe the share price is high, maximizing the proceeds of the offering. Moreover, if the company finds that it never needs more funds, it can elect not to sell any shares at all or to sell only a part of the maximum. The flexibility of SEDA means that companies can tailor their financing needs and align them with their growth objectives.
It is worth noting that the SEDA allocation increases the number of the company's outstanding shares and its total shareholders' equity while diluting the existing shareholders' equity. However, SEDA is generally viewed positively by the market since it is an indication that the company has access to flexible financing options.
In summary, Standby Equity Distribution Agreement (SEDA) is a type of private placement that offers publicly traded companies a flexible way of raising capital. It allows companies to customize their approach to capital and risk management, sell shares when the share price is high, and tailor financing needs to align with growth objectives. SEDA might be worth considering if you're a publicly traded company looking for flexible capital.