Table of contents
How does settlement and allotment work?
TL;DR
In capital raising, share allotment and settlement happen mainly through two methods: EFT and DvP. EFT involves direct transfers of funds and straightforward share allocations. DvP, more complex, is integrated with ASX's CHESS system for simultaneous share and fund transfers.
When raising capital, the mechanics of how investors receive their shares are as important as the fundraising itself. It's crucial to grasp the basics of share settlement to ensure a smooth process, and to understand the shareholder experience overall.
EFT settlement.
EFT settlement means investors transfer funds directly to your account. Once received, your share registry handles the rest: they reconcile the funds and issue shares to the investor’s account. This method is common for placements and shareholder offers and is appreciated for its directness and simplicity.
DvP settlement.
DvP, or Delivery versus Payment, is a more intricate method used in placements. It involves ASX's CHESS system, which ensures that share ownership transfer and fund transfer occur simultaneously to mitigate settlement risk. Setting up a DvP facility, typically managed by your lead manager, adds a layer of complexity and usually incurs an additional fee.
What is a shortfall and oversubscription?
TL;DR
In capital raising, a 'shortfall' is when investor interest falls short of your capital target, and an 'oversubscription' is when demand exceeds it, each with unique handling strategies.
When you're in the midst of a capital raise, understanding the potential outcomes is crucial. You'll often hear "shortfall" and "oversubscription."; here's what they mean and how you can navigate them.
Shortfall.
A shortfall is what you face when there's not enough investor interest to meet your targeted raise amount. This isn't the end of the road, though. You have options:
Capital raise | Shortfall actions |
Placement | (1) If underwritten, this risk lies with the lead manager who will either source more investor demand or buy up the shortfall.
(2) You can reach out to any participating investors or existing shareholders to gauge their interest and place the shortfall that way |
Shareholder offer | (1) You can extend the offer timeline to give shareholders more time to view and participate in the offer.
(2) You can pursue a shortfall placement to raise the remaining funds from sophisticated investors.
(3) You can contact your Chairman's list to place your remaining allocation to any interested shareholders who want to participate more. |
Oversubscription.
An oversubscription happens when investor interest is higher than your target. This is a good problem to have, with several ways to handle it:
Capital raise | Shortfall actions |
Placement | (1) The oversubscription is usually managed by the lead manager who decides on how to allot shares within their broker and investor network (e.g. prioritising specific investors or brokers).
(2) You may also have the right to issue extra shares (depending on ASX rules and regulations). |
Shareholder offer | (1) You can allocate shares proportionally to all participating shareholders, and return the surplus funds.
(2) You can allocate shares strategically to follow a set formula established when planning the raise (e.g. prioritising specific shareholders).
(3) You may also have the right to issue extra shares (depending on ASX rules and regulations). |
What is a Chairman's list?
TL;DR
The Chairman's list in capital raising is a select list of investors nominated by the company that typically includes HNW investors, existing directors and institutional investors.
In the world of capital raising, the Chairman's list plays a unique and strategic role. This list, curated by the company, often includes high-net-worth individuals, company management, and institutional investors.
Having a Chairman’s list is valuable when capital raising because:
It demonstrates pre-existing demand.
It saves on management fees.
Investors see it as a sign of confidence.
Since these investors are directly identified, you need to raise less capital through the lead manager and the need for external brokers to find investors diminishes, reducing the transaction costs (selling fee) associated with your capital raise.
Moreover, filling a portion of your capital raise, like a placement, with these selected investors showcases strong initial demand for your shares. It also cements relationships with key shareholders by involving them early in the capital-raising process (a process called wallcrossing to gauge interest).