Hi Dribs. Ask yourself this -
If a company needs quick funds so close to initial listing (January) - RED FLAG.
As a shareholder, would you rather the company had raised $16 million at 10c or 45c? A raise at 45c dilutes the shares on issue less than a larger raise at 10c. I think the company nailed it right here.
If they do s Soph offer at more than 10% discount - RED FLAG.
Generally a discount is warrant in these instances. Especially when the share price has rocket in such a short period of time. Like I said, based on my calculations of the moving average and fair discount I thought the raise would be somewhere 42c~46c. They did mange to secure 45c which is towards the slight upper end of my assessed range.
Not being transparent in nature/intent of capital raise (they say it was a sophisticated offer - usually done across a broker's client base - yet cornerstone investors somehow got significant stock???) - RED FLAG.
I understand your frustration and any many others. However raising to institutional investors is not necessarily a bad thing. If they share the same view of the company in terms of growth/outlook and view the share as a long term hold - they would not sell and this will benefit the company in terms of free publicity as more analysts covering the company.
How does private placement affect share price? (By Investopedia)
Private placement is a common method of raising business capital through offering
equity shares. Private placements can be done by either private companies wishing to acquire a few select investors or by publicly traded companies as a
secondary stock offering. When a publicly traded company issues a private placement, existing shareholders often sustain at least a
short-term loss from the resulting dilution of their shares. However, stockholders may see long-term gains if the company can effectively invest the extra capital obtained and ultimately increase its revenues and profitability.
Private placement is an issue of stock either to an individual person or corporate entity, or to a small group of investors. Investors typically involved in private placement issues are either
institutional investors, such as banks or
pension funds, or high-net-worth individuals. For an individual investor to participate in a private placement offering, he must be an
accredited investor as defined under regulations of the
Securities and Exchange Commission (SEC). This requirement is usually met by having a
net worth in excess of $1 million or an annual income in excess of $200,000. If the company conducting a private placement is a private company, then the private placement offering has no effect on share prices because there are no pre-existing shares.
With a publicly traded company, the percentage of equity ownership that existing shareholders have prior to the private placement is diluted by the secondary issuance of additional stock, since this increases the total number of shares outstanding. The extent of the
dilution is proportionate to the size of the private placement offering. For example, if there were 1 million shares of a company's stock outstanding prior to a private placement offering of 100,000 shares, then the private placement would result in existing shareholders having 10% less of an equity interest in the company. However, if the company offered an additional 1 million shares through the private placement, that would reduce the ownership percentage of existing shareholders by 50%.
The dilution of shares commonly leads to a corresponding decline in
share price, at least in the
near term. The effect of a private placement offering on share price is similar to the effect of a company doing a
stock split. The long-term effect on share price is much less certain and depends on how effectively the company employs the additional capital raised from the private placement. An important factor in determining the long-term share price is the company's reason for the private placement. If the company was on the verge of
insolvency and did the private placement as a means of avoiding
bankruptcy, it would not bode well for the company's shareholders.
However, if the motivation for the private placement was a circumstance in which the company saw an
outstanding opportunity for rapid growth that simply required additional financing, then the eventual extra profits realized from the company's expansion may push its stock price substantially higher. Another possible motivation for doing a private placement can be that the company cannot attract large numbers of institutional or
retail investors because the company's market sector is currently considered unattractive or because there are few analysts covering, and thereby publicizing, the company.
How do companies raise fresh funds? (By Morningstar)
Placements
Rights issues can get a bit messy for everyone involved and they take a bit of organising. So some companies raise new equity - usually in relatively small amounts - by making a "placement" to an institution or small group of people.
Placements can sometimes disadvantage excluded shareholders by diluting their interests in the company's earnings.
For example, say you own 1000 out of a total of 10,000 issued shares in Marigold Hotels Limited. In other words, you own 10 per cent of the company and are theoretically entitled to 10 per cent of its earnings. If the company makes $1 million, you make $100,000 - although obviously it may not all be paid out to you as a dividend.
What if Marigold now decides to raise equity through a placement of 1000 shares at the current market price to a major institution. Suddenly, 11,000 shares are on issue and you still own 1000. Your holding has been diluted to 9.1 per cent of the company.
If the company makes the same $1 million profit, through no fault of your own your share of the profits has fallen from $100,000 to $90,909. The company's actions have literally "robbed" you of almost $10,000.
The key question is whether earnings will in fact remain at $1 million after the cash injection. If Marigold is raising capital to expand its proven, successful hotel chain into new markets, the equity placement may be just what it needs to take it to the next growth phase.
It could be that instead of a $1 million profit next year, the company's expansion is wildly successful and it makes $1.5 million, of which you have a claim on 9.1 per cent or $136,350. You're in the money again.
As with rights issues, all you can do is assess to what use the company is putting the new money. Then make a decision on whether you are better off in or out.
References
http://www.investopedia.com/ask/answers/052815/how-does-private-placement-affect-share-price.asp
https://www.morningstar.com.au/learn/article/how-do-companies-raise-fresh-funds/3316?q=printme
Make your own judgement.
(20min delay)