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Why does a shelf matter?
If a high cash burning small cap has room to raise money off its shelf and it is trading significantly above fair value, it is highly likely that the company will issue additional shares either through a one time offering (RDO or underwritten deal), or file a ATM/Equity line and bleed shares out on the open market. These actions will dilute existing shareholders and have significant downward pressure on the stock price.
What is a shelf?
Shelf registrations are perhaps one of the most confusing and misunderstood topics in the trading community. Simply put, an effective S-3/F-3 shelf registration allows a company to raise money anytime and as many times within the next three years using the same registration statement up to the maximum dollar amount registered in the filing.
The purpose of the shelf registration is so that the company does not need to go back to the SEC each time and ask them to approve a registration statement for each subsequent offering. Each subsequent offering is considered a “shelf take-down” and will “incorporate by reference” the latest and already filed financial information about the company, thus avoiding additional SEC review.
The main benefit to the company is the flexibility it gains in issuing equity whenever it wants over the next three years; therefore, a shelf registration is NOT an immediate offering of shares, even though the issuer has the flexibility to do so if it wants to at the moment it is effective. The company also has many options in how it wants to use the shelf. Currently the most common types of offerings used by companies in a shelf take-down are Registered Direct Offerings (RDO), ATMs, and Equity Line of Credits.
OK that was confusing 😂 Here are some FAQs
How is a shelf related to other forms of offerings such as ATM, equity line, convertible debt etc... ?
The company must have an active shelf before they can register for ATM
Usage of any of the above mentioned financing instruments will decrease the shelf capacity by the amount of capital raised. For example, if a company raises $20 million through an ATM, the shelf's 'Current Raisable Amount' will also decrease by $20 million.
If a company only has a shelf, what does that mean?
In this case, the company has 2 options
They can raise through an offering, which requires the company to put out news that discloses the pricing and amount. Usually, the market reacts instantly and negatively to such a news.
An example headline is "Senmiao Technology Announces $6.5 Million Registered Direct Offering"
The company can file for ATM or equity line, which allows the company to issue shares on the open market.
Company has a huge shelf, in the realms of hundreds of millions, what does that mean?
When the shelf capacity is huge, such as many times the market cap, the shelf capacity is only directionally informative of potential dilution.
Generally, companies file shelves to use over 3 years, which means it is highly unlikely that a company will use a large proportion of the shelf capacity in a single offering.