Forum Topics Share Placement Plans - How do they work?
Stuey727
a week ago

Okay, so apparently a key thing I missed was that I need to make sure I'm signed up online for the communications with Automic. (I've been ignoring all those letters telling me to do things...) 

All sorted now. 

Thank you very much for your advice folks. Another random thought - when you exit a stock, are you better leaving a minimal amount of shares in that stock to enable you to participate in these SPPs? Does it work similarly in America (brokers like Stake don't have any brokerage fee, so could accumulate very small amounts of each share).

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Noddy74
a week ago

I have kept a share in pretty much every company I've sold as a matter of practice for the past decade.  It's meant that I've ended up owning a very small sliver of a whole lot of the ASX... The advantage of this is that you can then participate in SPPs (and to answer your question Stuey SPPs don't attract brokerage), plus it acts as a watchlist.  The cons are that most of the SPPs that you want to particpate in are done on a pro-rata basis so at best they'll round up and give you one additional share.  Plus, if I've made the decision to sell the company it's not often that I'll want to buy in just to game the arbitrage - that's just not how I roll... Plus, it clogs up your holdings.  Plus, companies hate it as it adds costs in regards to comms and Investor Relations - some will periodically use an ASX rule that allows them to sell down unmarketable parcels and return the funds to you.  Plus, it's kind of depressing to get a daily reminder of what could have been by seeing a single share of CSL, ARB, DMP, JBH, NXT, RMD, SEK, XRO (to name a few) in my holdings.

It's just habit now but I'm not sure I'd do so if I had my time again. 

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Bear77
a week ago

Just a word of warning about that 1-share-strategy for retaining optionality around SPPs, I have seen a number of companies get creative with their SPP scale backs (and also the scaling back of additional shares in EOs - Entitlement Offers) over the past couple of years.  Some are scaling back based on how many shares each applicant held on the record date.  Some are scaling back based on how many shares each applicant held on the SPP closing date, which is to try to stop people trying to arbitrage the SPP price when it is lower than the prevailing market price (selling shares on-market to buy them back cheaper via the SPP).  Some are not issuing ANY shares to applicants that held less than a marketable parcel or less than a certain number of shares on the record date or on the SPP closing date.

One quick example of that is NRW Holdings (NWH) which did a capital raising (CR) in December 2019 to help fund the acquisition of BGC Contracting.  The CR included a standard $10m SPP in which all shareholders (as at the 27-Nov-2019 record date) could apply for up to $15K worth of new NWH shares at $2.85/share - subject to that $10m SPP limit.  During the offer period, NWH traded as low as $3.13 and as high as $3.26, and the SPP closed oversubscribed.  As with all SPPs, when they are subject to a scale back, the scale back methodology is entirely up to the board's discretion.  In this case, they said the following in their 7-Jan-2020 SPP Results announcement:

RESULTS OF SHARE PURCHASE PLAN

NRW Holdings Limited (ASX:NWH) (NRW or the Company) advises that its share purchase plan (SPP) offer dated 6 December 2019 closed on 2 January 2020. The SPP raised $10M (before costs), which was the maximum amount sought to be raised by the SPP, at an issue price of $2.85 per new share.

A total of 3,508,659 new fully paid ordinary shares will be issued and allotted on 8 January 2020. The new shares are expected to commence trading on 9 January 2020.

The SPP was oversubscribed and this resulted in applications being scaled back. The Company advises that, in accordance with clause 10 of the terms and conditions of the SPP, the following methodology was implemented by the Company, in conjunction with its Share Registry, in relation to the scaling back of applications for shares under the SPP.

There was a total of 1,551 valid applications received, of which 55% applied for the maximum amount (being $15,000, equivalent to 5,263 shares).

  • Any holding that constituted an unmarketable parcel as at the Record Date for the SPP was excluded. There were 218 registered shareholder applicants in this category, including 163 registered applicants who held one share.
  • Eligible applicants (above the unmarketable parcel threshold) received approximately 64% of their application amount.

In accordance with the terms and conditions of the SPP, excess funds totalling $10.9M will be returned to the respective applicants without interest.

--- ends ---

So, not only did every shareholder who only held 1 share get no shares in the SPP, you didn't get any shares unless you held at least $500 worth of NWH shares (approx 167 shares at the time) on the record date, 27-Nov-2019, which was the day after their 2019 AGM, but the day BEFORE they announced the BGC acquisition and the associated CR (which included the SPP).  They even made a point of stating in that 7-Jan-2020 SPP Results announcement that there were 163 people who applied for shares in the SPP who only held 1 share - and they all got nothing.  The NRW Holdings board was clearly saying that they are aware of that trick and it's not going to work with them. 

I would guess that there are going to be more companies doing that in the future, or something similar.

As Noddy says, companies hate shareholders only holding one share - mostly because of the administration costs including what their share registry charge them for each and every individual shareholder that they have to deal with.  Many will regularly do that "unmarketable parcel" thing where they'll sell your shares (or share, singular) and send you a cheque - or put the proceeds in your nominated bank account, with no brokerage fees deducted (they pay the fees).  However, they have to give you prior notice before doing that, and you can opt out if you wish.  I have done so a couple of times - with a couple of different companies (where I held over $200 but under $500 worth of shares in those companies at that time, which is not commonplace for me, but does happen occcasionally) and my shares were NOT sold, because I had told them I didn't want them sold. 

The reality is that no amount of shares is actually unmarketable - as in can not be sold on-market - unless the entire holding (position) is worth less than a cent.  I can sell one cent worth of shares if I want to pay the $10 brokerage fee to Commsec, or the $14.95 fee to NABTrade, or the slightly higher fee to CBUS (where I manage my superannuation portfolio).  Of course, most people would instead donate those shares to charity (which is still a thing) for no cost, or ignore them - if the brokerage cost was going to be higher than the proceeds of the sale.  The $500 amount that the ASX refer to as being a "Marketable Parcel" of shares (with holdings worth less than $500 being regarded as an "Unmarketable Parcel" of shares) is just an arbitrary number that they've chosen to use as a threshold.  

 

Further Reading:

https://www.bwts.com.au/download/educational-articles/Rights Issues and Share Purchase Plans.pdf

https://arichlife.com.au/will-this-share-purchase-be-scaled-back/

https://www.onmarket.com.au/help-faq/spp-harvester/how-much-will-i-be-allocated-in-share-purchase-plan/

https://www.smh.com.au/business/missing-out-on-easy-money-20090623-cumd.html

https://www.onmarket.com.au/help-faq/spp-harvester/what-is-spp-harvester/

https://www.maynereport.com/articles/2020/04/03-1240-3652.html

  • Sample 1:  August 7: Bellevue Gold (BGL): Announced a $100m placement at the fixed price of $1, a 10.7% discount to the last close of $1.12, to be followed by a $20 million SPP at the same price with no VWAP pricing alternative. The placement outcome announcement claimed the book was covered "multiple times" and made no commitment to pro-rata allocations. Also no reference to what percentage of stock went to existing holders, which is normal in these announcements. Good participation disclosure in the SPP outcome announcement except for the failure to reveal total applications. The $20 million cap was lifted to $35 million and the scale back policy was based on size of holding based on two thresholds: below 1000 shares got 403 shares and between 1001 shares and 29,999 shares got 78% of their application whilst everyone above 30,000 got the lot. It was a bit unfair to scale back someone with 900 shares to just a $403 allocation but apart from that, the expansion was welcome and scale back policy reasonable. Stock finished the year at $1.12 so reasonable return.
  • Sample 2:  April 23, Cochlear (COH): an $880 million placement at $140, followed by a $50 million SPP which is patently too small. Failings were not having a bookbuild to set the placement price, unfairly limiting the SPP and allocating too many shares to a single London-based fund manager, Veritas Asset Management, which picked up an astonishing 34% of the $880 million Cochlear placement. We only know this because Veritas launched a buying splurge shortly before and after the placement to finish up with a 5.57% stake which was above the 5% substantial shareholder rule in Australia and was therefore disclosed to the ASX on April 2. It really is offensive that 36,724 retail shareholders were proposed to be limited to $50 million, when one London fund manager was given more than 6 times that amount of shares in a discounted placement. In the end, Cochlear received $417 million in applications from 16,651 shareholders, a 45% participation rate. The board lifted the SPP cap to $220 million but still refunded $197 million, the bulk of which went to smaller shareholders because the allocation formula favoured bigger holders. All is explained in this 3 page ASX announcement from Cochlear at the end of the offer, which did well on the transparency front. Retail finished up receiving 20% of a $1.1 billion capital raising which the board claimed doesn't material change the pre-raising allocations. I suspect retail had a touch more than 20% before the placement launch and it remains remarkable that board seriously thought it could limit retail to just $50m. Do the maths. If all 36,724 holders had applied for the maximum $30,000 new shares in the SPP, that would have brought in $1.1 billion. The majority of Cochlear's shareholders, 20,073 in fact, didn't bother applying at all and they are the biggest losers in Australia's capital raising system. Only a renounceable offer would fairly compensate these investors, many of whom are never even told about the offer by their financial adviser or fund. Stock finished the year at $189. 5/10

https://www.crikey.com.au/2014/12/17/mayne-gerry-harvey-gets-richer-while-small-shareholders-shrug/

https://www.theage.com.au/business/around-the-grounds-of-capital-raisings-20090915-fo18.html

https://www.eurekareport.com.au/investment-news/pandemic-agms-spp-refunds-nab-shafts-retail-and-much-more/147500

https://investorinsight.com.au/home/nrw-holdings-raises-10m-from-share-purchase-plan

 

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Stuey727
2 weeks ago

Hey guys - I'm invested in a business that is currently doing a SPP that is at a reasonable discount to an (extremely volatile) shareprice. 

I'm trying to work out how the practicalities of how SPPs work. (I know it's like an up to 30k placement to existing shareholders).

Essentially, can anyone shed some light on the following:

 

How long does it normally take to apply and how are applications normally received? What information do I need?

 

 

How competitive can they get? This one is on a first come, first served basis - how attentively do I need to be watching the company? 

 

 

How do you pay and when do funds need to be received by? 

 

 

How risky is it to sell shares at a premium and buy back in with the SPP at a discount - or to overpurchase and then sell back on market - guessing people do this, so very risky. 

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Noddy74
2 weeks ago

Hi Stuey,

There are various flavours of SPP as there are various reasons for a Board to choose to go down that route. Before you think about participating it's worth thinking about the Board's motivation for doing the capital raise.  I tend to think of the reasosn for a capital raise as a spectrum. At one end of the spectrum they're doing it because they have no cash, they have no other options and if they don't they'll no longer be a going concern.  At the other end of the spectrum they're doing it because they've identified an extraordinary growth opportunity, they have loads of different options to fund that growth but have decided to do the right thing by their shareholders and do a capital raise at a discount to the current price.  I'd say most capital raises sit somewhere between these two extremes and it's worth considering where yours sits before you decide to participate.

An SPP is often preceeded by an institutional capital raise.  This is generally where the most capital is raised (relative to the SPP) and is easier and cheaper than a retail SPP.  For that reason sometimes that's all the company will do and won't give retail shareholders the opportunity to participate.  As a retail investor I hate seeing when that happens and vice versa welcome it when they do offer the SPP.  The rules governing how the SPP will operate are really broad.  If you look at Alcidion's SPP recently they had all sorts of rules, which were really about rewarding long term holders, who believed in the prospects in the company, wanted to participate and were less worried about waiting until right to the end of the SPP to see the size of the discount they were likely to get.  Some companies dicate the size of the involvement you can have (e.g. a 1 new for x shares held entitlement) and others don't. Some scale up or down depending on demand and others don't.

What you described in terms of selling your existing holding and and buying back in the SPP is a legitimate strategy to try and not get too overweight in one company.  Just be aware that occassionally companies may scale you back significantly if you do that.  If they haven't said they are going to then I don't think it's a big risk. The degree you end up getting scaled back is generally a direct consequence of the discount being offered.  As the discount increases I feel more confident in participating to the maximum extent a) because I'll maximise the arbitrage and b) because I'll get scaled back anyway.  It's not uncommon for it to be overprescribed 5 or even 10 times - in which case you'll get a fraction of the shares you nominated (and the difference gets refunded to you).

In terms of price action following an SPP you might think that there's a big sell side response as holders try to re-weight their investment i.e. sell some of the SPP, and you could end up selling at a discount to the SPP price.  It's clearly a risk but generally I've had a pretty good record with SPPs - I suspect there's a fair bit of talk that goes on in the background between companies and instos/underwriters to ensure they are at worst neutral in outcome (that could just be me wearing my tinfoil hat though!).  I've got one at the moment with Wisr and if all else stays equal I'll participate to the maximum extent.  Yes that reflects the discount but more importantly I've been building increasing conviction in the company itself and its growth prospects and this is good opportunity to average up my holding.

Last point - if you're a current holder you will be sent an SPP booklet that will set out all the rules, how to partipate etc.  Definitely read it - I've done quite a few of these now but I don't take something like this as a given and make sure I read the rules.

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Tom73
2 weeks ago

Hi Stuey727

Reading the SPP is the only way to get most of the answers on this (each can be different), but some general points:

 

How long does it normally take to apply and how are applications normally received? What information do I need?

The SPP should detail this, you should receive a copy as a shareholder or it may be available via an ASX announcement. 

 

How competitive can they get? This one is on a first come, first served basis - how attentively do I need to be watching the company? 

Company dependent - treat it like a new investment and watch accordingly.  Generally it is worth waiting until the last day of the SPP to make the decision to invest because the shares may trade below the SPP price in which case you can pick them up more cheaply (if you want to increase your position size).  However, a first come first served offer will mean your are at risk of missing out if you wait.

 

How do you pay and when do funds need to be received by? 

Most I receive give a b-pay option which is what I use (takes 1 min).  The SPP will specify when the offer is open until or the conditions of receipt of funds and when shares will be allocated and excess funds returned.

 

How risky is it to sell shares at a premium and buy back in with the SPP at a discount - or to over purchase and then sell back on market - guessing people do this, so very risky. 

A common play - risk is that you will not get the share allocation you had hoped for.

 

Hope this helps.

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Stuey727
2 weeks ago

Both of those responses are fantastic thanks guys. 

Yeah, this one was preceded by an institutional raise - it's a mining explorer, so they need capital to continue. (They have maybe 6 months on hand) 

I guess I'll have to read their thing when it comes out - just hope I'm watching closely enough to get in given it's first come first served. 

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colinp
2 weeks ago

Given SPPs are almost always run at a discount to the market price you can almost always make a profit by participating in an SPP and selling either in advance or after your SPP shares are allocated. Just beware that "almost always" is not the same as "always" - it's a good bet but it is NOT a gauranteed arbitrage as you hold timing risk due to the lag between when you send in money to participate and when your shares are allocated. <p> For that reason it's probably worthwhile participating even if you don't want to increase your holding as you are likely to be able to flip the shares for a quick profit, but don't use money you can't afford not to recoup quickly.<p>

NB: If you're looking for a quick profit flip I recommend assessing how stable the company is. Participating in an SPP just to flip the shares has a different risk profile if the company is an established business raising money for a new acquisition versus if it's a speculative pre-production miner raising money just to keep their exploration activities going.

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Bear77
2 weeks ago

Great replies there guys.  Unlike yesterday (or was it Wednesday?), I didn't rush in to answer this one, as I tend to take a while to get my thoughts into a readable format, and my reply can become redundant by the time I post it.  Instead I thought I'd wait and see what else was posted, and I think it's all been covered nicely.

Since you have confirmed that this SPP is for a mining explorer Stuey who need the money because they would have run out of money within around 6 months, I will add that in these types of cases, I personally will only participate if I have reason to have a great deal of confidence in the company and their future prospects, which would usually be based on their management's prior track record.  Kudos to them for extending an SPP to ordinary retail shareholders instead of simply doing a placement to soph's and insto's (sophisticated investors and institutions - who legally require much less disclosure from the company raising the money, particularly in relation to the risks of the investment) because placements are a LOT cheaper.  However, perhaps look at how often they have previously raised money, and at what prices, and if their share price trajectory is heading in the right or wrong direction.  For instance if they regularly raise money at lower and lower prices and their SP is heading South East at a good clip, then they need to find something good real soon or people are likely to stop giving them more money. 

One of the reasons why a company MIGHT be doing an SPP instead of doing a placement is because they've been told that no insto's want to give them any more money.  That is not the case here, because you've said that they did an insto raise before the retail SPP, so - assuming that the insto raise was fully subscribed - then I think we can assume they have access to capital and are just doing the SPP to look after all of their shareholders by giving them all the same opportunity to buy further shares at the same discounted price. 

But being a mining explorer, I assume they do not have any income other than by raising capital, so if you do participate in the SPP and you do not get the opportunity to flip the shares at a profit, you might find yourself underwater on them in the near future or at some point not too far away, like when they do their next capital raising, perhaps in another 6 months. 

I think you have to approach these sort of SPPs a lot differently to those ones that are extended to shareholders by larger companies who already generate profits and have a positive future outlook that is not largely reliant on good luck.

Hope that helps.

P.S. If they are a project developer rather than just a mining explorer that does change things because at least they have an asset to develop.  However, if they are just a mining explorer who haven't found anything that is commercially viable enough to develop yet, then I think my comments could possibly apply.

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Stuey727
a week ago

Awesome feedback thanks guys. 

Thanks Noddy that's very helpful. I might look at selling a portion of my current holding.  

Yep, agree that it's significantly different with mining explorers Bear. It's the one I've been posting on recently, but wasn't wanting to be seen spamming it, just genuinely trying to work out what's going on - This raise is actually at an increased price to the list price. 

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