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Pre-funded warrants
Also called: pre-funded warrant, penny warrants
Warrants sold for almost the full share price up front, leaving a nominal exercise price such as $0.0001, used in place of shares for buyers near an ownership limit.
Explanation
In many small-cap offerings, investors can choose shares or pre-funded warrants. A pre-funded warrant costs the offering price minus a tiny remaining exercise price (often $0.0001 or $0.001), so economically it is the share, just not issued yet. It can be exercised at any time.
They exist because of ownership limits. A fund that would cross 4.99% or 9.99% of the company by taking shares would take on reporting duties (Schedule 13D or 13G, and insider status above 10%), so it takes pre-funded warrants with a “blocker” that forbids exercising above the limit.
Pre-funded warrants are left out of the shares-outstanding figure on a 10-Q cover, but companies usually include them in the weighted-average share count used for earnings per share, because shares issuable for little or no cash count as outstanding (ASC 260).
Why it matters
Ignoring them understates dilution: a cover-page share count can look stable while pre-funded warrants for millions of shares sit ready to convert.
How Equity Dictionary measures it
Warrants outstanding, including pre-funded ones where the company tags them in XBRL, enter the overhang factor. The screener measures share growth on diluted weighted-average shares, which usually already include pre-funded warrants.
Related terms
- Warrants: Contracts issued by a company that let the holder buy new shares at a fixed exercise price until an expiry date, often five years out.
- Overhang: Shares that could be added to the market from warrants, options, convertibles and unvested stock awards, which tends to weigh on the share price.
- Registered direct offering (RDO): A sale of registered shares negotiated directly with a few institutional investors through a placement agent, usually at a discount and closed within a day or two.
- Dilution: The shrinking of each existing shareholder’s ownership stake when a company issues new shares.
- Schedule 13D and 13G: The reports anyone who acquires more than 5% of a company’s voting stock must file: 13D for activists and would-be controllers, the shorter 13G for passive investors.
Plain-English summary for research; not legal or investment advice.