Tap Agreement

Tap Agreement: Understanding What it is and How it Works

A tap agreement is a type of agreement that allows a company to issue additional shares of stock to selected investors if certain predetermined conditions are met. This agreement is also known as a standby equity distribution agreement (SEDA).

In simpler terms, a tap agreement is a contract between a company and one or more institutional investors that outlines the terms of a potential stock issuance. This agreement allows a company to raise capital without necessarily having to go to the public market for funding.

How Does a Tap Agreement Work?

When a company wants to enter into a tap agreement, it typically works with an institutional investor such as a hedge fund or private equity firm. The investor agrees to purchase a certain number of shares of the company`s stock at a specified price.

In exchange for this commitment, the investor receives a fee or equity warrant that gives them the right to purchase a certain number of additional shares of stock at a later date, typically over a period of several years. These additional shares are referred to as “taps,” hence the name “tap agreement.”

The conditions that trigger the issuance of taps are predetermined and typically relate to the company’s financial performance. For example, a tap agreement may specify that taps will be issued if the company’s stock price falls below a certain level or if the company’s revenue falls below a certain threshold.

Once the predetermined conditions are met, the investor has the right to purchase additional shares of stock at the same price as the initial purchase. The proceeds from the tap issuance then go to the company, providing an additional source of capital without diluting the existing shareholder base.

Benefits of a Tap Agreement

Tap agreements can provide several benefits to companies looking to raise capital. Here are some of the key advantages:

1. Access to capital: Tap agreements allow companies to raise capital without the need to issue new shares or sell existing shares on the open market.

2. Reduced dilution: Since the tap agreement allows for the issuance of additional shares at the same price as the initial purchase, there is no dilution of the existing shareholder base.

3. Flexibility: Tap agreements provide companies with more flexibility than traditional equity financings. The predetermined conditions for issuing taps can be tailored to the company’s specific needs and goals.

4. Cost-effective: Tap agreements can be more cost-effective than traditional equity financings since they avoid the fees associated with going public or hiring brokers to sell shares in a private placement.

Conclusion

A tap agreement can be an effective way for companies to raise capital without diluting the existing shareholder base. By working with an institutional investor, companies can enter into an agreement that outlines the terms of a potential stock issuance based on predetermined conditions. This provides companies with more flexibility and can be a cost-effective way to raise capital. However, before entering into a tap agreement, companies should carefully consider the terms of the agreement and ensure that it aligns with their long-term goals and objectives.