Share subscription facility, not a subscription credit line

A share subscription facility is an equity drawdown facility: an investor agrees to subscribe for new shares of a listed company on that company's demand, over a fixed term, at a market-referenced price. It is not a subscription credit facility, which is a loan to a private-equity fund secured on its investors' uncalled capital commitments.

Key takeaways

• Most of the search results are a different product. The phrase is dominated by fund-finance writing on capital-call subscription credit lines. Those are loans to funds, not equity for issuers.
• The word "subscription" is doing two jobs. Here it means subscribing for newly issued shares. In fund finance it means the subscription agreements by which investors commit capital to a fund, which are the lender's collateral.
• Share subscription facility is the label used outside the United States. Subscription-style facilities are announced on Euronext, Nasdaq First North, the ASX and the TSXV, and by foreign private issuers on US markets.
• The pricing period is long. Where a US standby facility prices across a few trading days, subscription facilities commonly average across many, which moves price risk onto the issuer.
• Warrants, fees and share lending come with it. A warrant at signing, a commitment fee on the aggregate limit and a stock loan from an existing holder all belong in the dilution arithmetic.

The product that owns this phrase

Search the exact phrase and most of what comes back is fund finance: guidance on subscription credit facilities, also called capital-call facilities or sub-lines, from practices such as Mayer Brown. That product is a revolving loan to a private-equity or credit fund, underwritten on the creditworthiness of the fund's investors and secured by a pledge of their uncalled commitments and of the general partner's right to call them. It bridges the weeks between signing a deal and drawing capital, and it is repaid out of the capital call.

None of that describes what a listed company signs. The only overlap is the word.

How a share subscription facility is drawn

The issuer serves a subscription request notice stating the amount. That opens a pricing period of consecutive trading days, at the end of which the subscription price is computed from an average of the market price across the period and the share count falls out of the arithmetic. Settlement follows on the next trading day, and the new shares are allotted and admitted to trading under the applicable listing rules. There is normally one request per pricing period, no minimum drawdown obligation, and a floor the issuer may set for that draw.

Because the shares are allotted rather than resold, the constraint is corporate and listing law, not resale registration: the board's authority to issue, any pre-emption disapplication, and the placement capacity rules of the market concerned. See financing a UK or AIM-listed issuer and the SEDA route and its authority checks. For a US-listed issuer the facility depends instead on a registration statement and on the Rule 144 position of anything unregistered.

The long window is the real trade

The most consequential difference between this and a US standby equity purchase agreement is the length of the pricing period. Averaging across many days lets the investor work out of the position into ordinary daily liquidity, which is what makes a large commitment possible on a thinly traded stock. The issuer pays for that in price certainty: the subscription price is whatever the market does over the whole period, including the effect of the investor's own selling. Model the draw against a falling tape, not a flat one.

Warrant, commitment fee and share lending

Three things travel with this structure in market practice. A commitment fee on the aggregate limit, payable in cash out of drawdown proceeds or in shares. A warrant granted at signing, exercisable over a period of years, which is dilution that arrives whether or not you draw. And a share lending arrangement, under which an existing holder lends stock to the investor so that sales made during the pricing period can settle before the new shares are issued. That last one is a hard gate: an issuer with no shareholder willing to lend cannot use a facility built this way, and the lending shareholder needs its own advice on disclosure, tax and voting. Send the register concentration.

Related reading

• All instruments compared
• Dilution and conversion mechanics
• Financing an ASX-listed issuer
• Check whether you qualify

Primary sources

• U.S. Securities and Exchange Commission — EDGAR full-text search
• legislation.gov.uk — Companies Act 2006, section 561 (existing shareholders' right of pre-emption)
• London Stock Exchange — AIM Rules for Companies
• U.S. Securities and Exchange Commission — Securities Act Sections CFIs, Question 139.13

Share subscription facilities: frequently asked questions

What is a share subscription facility?

A share subscription facility is an agreement under which an investor commits to subscribe for newly issued shares of a listed company whenever the company serves a subscription request notice, up to an agreed aggregate limit and over an agreed term. The subscription price is a percentage of an average market price measured across a pricing period that begins with the notice.

How is a share subscription facility different from a subscription credit facility?

They share a word and nothing else. A share subscription facility provides equity to a listed operating company, and the subscription is for newly issued shares. A subscription credit facility is a revolving loan to a private-equity or credit fund, secured on the uncalled capital commitments its investors made in their subscription agreements, and it is repaid out of a capital call.

Why is the pricing period so long?

Because the investor needs time to work out of the position it is taking. A long averaging period lets the investor sell into ordinary daily liquidity rather than into a single print, which is what makes a large commitment possible on a thin stock. The cost of that is borne by the issuer, whose subscription price is set by whatever the market does across the whole period.

Why do these facilities involve a share lending arrangement?

Because settlement of the new shares happens at the end of the pricing period, not at the start. In market practice an existing shareholder lends stock to the investor so that sales made during the period can settle, and the borrowed shares are returned when the subscription settles. An issuer with no shareholder willing to lend cannot use a facility built this way.