Standby equity facilities outside the United States

Outside the United States a standby equity facility is normally documented as a standby equity distribution agreement, and the constraint that governs it is company law rather than securities registration. There is no resale registration statement and no Rule 144: the new shares are allotted and admitted to trading under the local rulebook, and the binding limits are the authority to allot, pre-emption and the prospectus threshold.

Key takeaways

• Corporate authority is the binding constraint, not registration. A UK issuer needs authority to allot under section 551 of the Companies Act 2006 and a disapplication of statutory pre-emption under section 561, or the facility has no headroom to draw against.
• Tradability arrives by admission, not by effectiveness. New shares are allotted and admitted under the local listing rules and are ordinarily tradable on admission, subject to anything the documents restrict.
• The prospectus threshold sizes the tranches. Aggregate admissions over a rolling period can trigger a prospectus obligation, which is why an offshore facility is drawn in measured amounts rather than emptied.
• Every drawdown is an announcement. Continuous-disclosure rules fix when each allotment must be told to the market, so the facility is visible from the first draw.
• SEDA and SEPA are the same structure under two labels. The naming history, and why the market split, is set out on the standby equity purchase agreement page.

Why the offshore facility is a different problem

The mechanics of the instrument do not change when it crosses a border. A commitment, a drawdown notice, a pricing window and a formula price behave the same everywhere. What changes is the gate the shares have to pass through before they can be sold, and that changes the whole risk allocation.

On a US listing, the facility is legally two transactions and the second one is a registered resale. Everything hangs on a registration statement being filed and declared effective, which is why the US documentation devotes most of its conditionality to registration. Draw the same facility on AIM, Euronext Growth, the ASX or the TSXV and there is no such statement to wait for. The shares are allotted by the board, admitted to trading by the exchange, and are ordinarily dealable on admission. The investor's exit risk therefore collapses from a regulatory timetable into an administrative one — and in exchange, the issuer picks up a constraint the US issuer does not have, because it cannot allot at all without shareholder authority already in place.

That is the whole trade. A US facility is gated by a regulator; a non-US facility is gated by the issuer's own shareholders, twelve months in advance, at a general meeting that has usually already happened.

The UK sequence, in the order it has to happen

Britain is where the term SEDA is still most often seen in a regulatory announcement, and it is also the jurisdiction where the sequencing catches issuers out most often. The order is not negotiable.

First, authority to allot. Section 551 of the Companies Act 2006 requires directors to be authorised by the articles or by an ordinary resolution before they may allot shares. The authority states a maximum nominal amount and expires, normally at the next annual general meeting. A facility commitment larger than the remaining authority is not a funding plan.

Second, disapplication of pre-emption. Section 561 gives existing holders a right of first refusal over an allotment for cash. A facility issues to one named subscriber, so that right has to be disapplied under section 570 or section 571 by special resolution. Market practice caps the routine annual disapplication well below what a large facility would need, which is why the general meeting is usually the real gate rather than the counterparty.

Third, the prospectus threshold. Admission of new shares is a public offer question measured cumulatively, so the aggregate admitted over a rolling period governs whether a prospectus is required. That is what turns a headline commitment into a schedule of tranches.

Fourth, disclosure. Entering the facility is announceable in its own right, and so is each allotment and admission. There is no such thing as a quiet facility on a UK listing; the pricing formula reaches the market with the first announcement.

Australia, Canada and the dual-listed case

Outside the United Kingdom the same logic runs through different instruments. On the ASX the gate is not shareholder authority in the company-law sense but Listing Rule 7.1 placement capacity: a finite percentage of issued capital in a rolling 12-month window, extended where holders have approved Listing Rule 7.1A, and in that case subject to a floor price expressed as a percentage of a 15-day volume weighted average. A facility sized above the remaining capacity simply cannot be drawn until the window refreshes or a meeting is held. In Canada the facility is a distribution under a prospectus exemption, so the four-month hold under National Instrument 45-102 attaches to everything issued outside Part 5A, and the exchange has to accept the facility before the first draw.

The case that catches people is the dual-listed issuer. A company quoted on AIM and on Nasdaq, or on the TSXV and the OTCQB, is subject to both regimes at once: it needs the allotment authority and a resale route for any US holder. A purchaser acquiring under a US exemption holds restricted securities as a matter of US law whatever the position on the home market, so the Rule 144 analysis does not go away merely because the shares were admitted in London. Where the issuer has ever been a shell company, Rule 144(i) can close that route entirely, and the facility then has to be documented around a registration statement after all. If the issuer is quoted in two places at once, send both listings and the authorities you already hold.

Related reading

• All instruments compared
• Private placement by a public company
• Share placings (UK)
• Share purchase plans (ASX)
• Listed Issuer Financing Exemption
• Dilution and conversion mechanics
• Check whether you qualify

Primary sources

• legislation.gov.uk — Companies Act 2006, section 551 (power of directors to allot shares)
• legislation.gov.uk — Companies Act 2006, section 561 (existing shareholders' right of pre-emption)
• legislation.gov.uk — Companies Act 2006, section 570 (disapplication of pre-emption rights)
• London Stock Exchange — AIM Rules for Companies
• U.S. Securities and Exchange Commission — EDGAR full-text search

Standby equity facilities outside the US: frequently asked questions

What is a standby equity distribution agreement?

A standby equity distribution agreement is a standing commitment by an investor to subscribe for newly issued shares of a listed company whenever the company serves a drawdown notice, up to an agreed amount and over an agreed term. Each drawdown is priced from an average of the market price across a defined window rather than at a fixed price agreed in advance.

Which markets still call it a SEDA?

Mainly the United Kingdom and Europe. UK, AIM and European regulatory announcements continue to use standby equity distribution agreement, while SEC filings by US-listed issuers have moved almost entirely to standby equity purchase agreement. The naming history is on the standby equity purchase agreement page; nothing about the instrument turns on which label a document uses.

Are shares issued under a SEDA freely tradable?

It depends on the listing and the route, and it is never automatic. On a non-US market the new shares are allotted and admitted to trading under the local listing rules, and are ordinarily tradable on admission subject to anything the documents restrict. For a US-listed issuer they are restricted securities until a resale registration statement covering them is effective, or until the Rule 144 conditions are satisfied where Rule 144 is available.

What corporate authority does a UK company need for a SEDA?

Directors need authority to allot the shares under section 551 of the Companies Act 2006, and statutory pre-emption rights under section 561 must be disapplied, normally under section 570 or section 571. Both are shareholder resolutions with a stated maximum and an expiry date. If the facility could issue more shares than the disapplied headroom, the excess needs approval before it can be drawn.