Dictionary › Dilution & financing
Equity line of credit (ELOC)
Also called: equity line, committed equity facility, equity purchase agreement, common stock purchase agreement, standby equity purchase agreement
A facility in which an investor commits to buy up to a set amount of a company’s new shares over time, at the company’s request, at a discount to recent prices.
Explanation
The company signs a purchase agreement with a specialist investor (Lincoln Park, B. Riley Principal Capital, Keystone Capital, White Lion and Tumim Stone are frequent names) for, say, up to $50 million over 24 or 36 months. Whenever it wants cash, it sells shares to the investor at a small discount to recent trading prices, within daily volume limits and a cap that keeps the investor below 4.99% or 9.99% ownership.
The investor does not want to own the stock. It resells the shares into the market as fast as volume allows, under a resale registration the company files, which makes it a statutory underwriter of that resale. The facility therefore works only while there is enough trading volume to absorb the selling.
Companies often pay a commitment fee in shares up front. On Nasdaq, sales are also limited to 19.99% of the shares outstanding before the deal unless shareholders approve more or the shares are sold at or above the Minimum Price (Rule 5635(d)).
Why it matters
An ELOC is financing of last resort for many micro-caps: it signals the company could not raise money on better terms, and it creates steady selling pressure for as long as the line is drawn.
How Equity Dictionary measures it
Equity lines are recognized from their documents (“committed equity facility”, “equity purchase agreement”, “common stock purchase agreement”) or from the name of a known equity-line investor. An equity line is the most ready state for the shelf and registration factor (90 out of 100), and its filings sharing one registration file number count as a single raise.
Related terms
- At-the-market offering (ATM): A program that lets a company sell new shares a little at a time directly into the market at prevailing prices, through a broker acting as its sales agent.
- Toxic financing: Convertible securities whose conversion price floats with the market, so the lower the stock falls, the more shares the holder receives.
- Baby-shelf rule: The Form S-3 limit that lets a company with less than $75 million of public float sell no more than one-third of that float through its shelf in any 12 months.
- Dilution: The shrinking of each existing shareholder’s ownership stake when a company issues new shares.
- Private investment in public equity (PIPE): A sale of unregistered stock, convertibles or warrants by a public company directly to selected investors, who usually get the shares registered for resale afterwards.
Plain-English summary for research; not legal or investment advice.