Using the raise as an example.
The investors that took head stock (i.e. the main shares on issue) at the issue price of 10c, are entitled to receive onefree option for every 2 shares they take in the capital raise...
The options give the holder a right, but not the obligation, to buy shares (this is an issue of new shares by the company) at the strike price of the options, up to a defined expiry date...
In this case. 13.5c options with a 2 year expiry. So a holder of an option can, at any time in the next 2 years, force the company to create new shares, and they pay 13.5c for them....
So, if the stock runs to 25c, then the option holder can "exercise" their options, by paying 13.5c to the company (so they company will receive the cash), and they will own a share that is worth 25c on the market. Happy days in principal.
If the stock stays below 13.5c, then likely nothing happens, no exercise, no new shares.
This is common practice to offer options up as a sweetener in small cap stock raises to get the investors on board. Unfortunately, this allows the participants to sell the head stock and still keep the exposure to a rising share price via the options. They can take off the risk as they get most or all of their money back and have locked in the "option" to buy the stock for 13.5 at any point in time for the next 2 years... Its a great deal for the investors in the raise.
This is why we can see a heavily discounted raise like this trade at issue price (10c), and often below in the week or two after as the new stock washes through. At this stage though, the participants in the raise haven't received their shares yet and they cant sell them until end of next week, so we may not have seen any selling pressure from them yet, unless they want to hold and keep the risk on.
Wait and see now I suppose.
Expand
