Definition of Standby Equity Agreement

What is the definition of the term "Standby Equity Agreement"? What is meant by the term "Standby Equity Agreement"?

A "Standby Equity Agreement" is a financing arrangement between a publicly traded company and an investor, typically an institutional firm. Under this agreement, the investor commits to purchasing a certain amount of the company's shares over a defined period, but only when the company chooses to "draw down" funds.

Here's how it works: the company can sell newly issued shares to the investor at its discretion, usually at a small discount to the current market price. This allows the company to raise capital without issuing debt or launching a large public offering all at once.

Standby Equity Agreements are often used by small-cap or micro-cap companies looking to access flexible funding. However, they can be controversial - frequent drawdowns may lead to dilution of existing shareholders, and market participants may view the arrangement as a sign the company is struggling to raise cash through traditional means.

Still, for firms that need capital in stages or want to avoid the regulatory burden of a full-blown secondary offering, a Standby Equity Agreement can be a useful tool.

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