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credit to...Jonathan Shapiro Senior reporter

"What do you do if you’re a small listed company with big ambitions to finance but only small investors backing your vision? One solution is to call Los Angeles investment firm LDA Capital.No matter how small, speculative or even tarnished a prospect might be, LDA Capital appears willing to provide a healthily sized equity financing package that can be tapped in all market conditions.

The little known LDA Capital was founded in 2018 according to its website that lists former investment banker Anthony Romano and Warren Baker as its leaders.While it invests extensively around the world in public and private companies, LDA has found a happy hunting ground at the speculative end of the Australian sharemarket.It has been involved in financing some of the ASX’s most divisive companies including Brainchip, Skin Element and GetSwift – which, having defected to Canada, has this week filed for administration.

LDA Capital’s financing model is intriguing and, while it does appear well suited to speculative growth companies that need capital but lack institutional support, it’s not without risks.The way a typical LDA financing arrangement works is as follows: LDA will agree to provide a set amount of equity financing to a company – say a minimum of $10 million and a maximum of $50 million, over a certain period. The company, at its discretion, can issue periodic capital calls that draw on the funding.When a call is made, a certain number of shares are issued to LDA Capital, which then sells them into the open market over, say, 10 days.The number of shares issued to LDA is limited by the average turnover of the stock to avoid it being stuck with more shares than the market can absorb.LDA does not pay for the shares upfront, only on settlement. The price it pays for the shares (that is, the amount of new capital raised) is based on the volume weighted average price only after the call is made, less a discount of about 10 per cent.

It’s an arrangement that appears well suited to small companies that have drummed up solid retail interest through penny stock websites and sharemarket forums, yet haven’t been embraced by the big end of town.LDA Capital’s most high-profile Australian play certainly fits that brief: Brainchip, which has surged up the market cap ranks and was newly admitted into the S&P/ASX 200.Brain explosionBrainchip has had financing arrangements in place with LDA since August 2020 in which it could call on a minimum of $20 million of financing and a maximum of $45 million of capital over a one-year period. LDA was also paid fees and granted over 100 million options, netting tens of millions of dollars of profit.

Interestingly, Brainchip required an extension to draw the minimum amount under the LDA facility, at which point a new financing arrangement that gave it access to a further $35 million became effective.The latest, and largest, is iron ore play Hawsons Iron, which said in December 2021 that it had secured $200 million through an LDA Capital facility.Both Hawsons Iron and GetSwift touted the financing arrangements as providing continued and reliable access to capital, even when market conditions were prohibitive or volatile.

Perhaps it’s a case of imitation as the highest form of flattery, as Australian hedge fund Regal Funds Management has also embraced the LDA model.Regal, which knows its way around the smaller end of the market better than most, provided facilities of $5 million and $20.5 million to micro cap stocks Allegiance Coal and Netlinkz.These arrangements allow small companies to raise new capital on the back of retail enthusiasm, but they are not without risks.

Some traders liken them to so-called death spiral financing. The term is used to describe convertible note placements to institutions that can result in a ballooning number of shares being issued to ensure they are fully paid back.While these situations are different, without a fixed share price, such an arrangement creates the potential for an increased number of shares to be issued per dollar of financing required.Whether the companies that adopt this financing find themselves in a death spiral or able to achieve escape velocity is what retail punters are betting on all the time.

The bet LDA and Regal are taking is simply that there’s a sufficient supply of punters out there willing to take their stock.Jonathan Shapiro writes about banking and finance, specialising in hedge funds, corporate"