First, lets suppose you are the president of a corporation. In the course of your normal business you come across opportunities all the time. Some require a small amount of funding and some require a large amount of funding. Typically, the best deals are the ones that need larger funding and fast yes or no decisions. A particular operation that you have had your eye comes available. Normally this operation might cost you say $100 Million to acquire but due to circumstances you have been able to negotiate a deal at $75 Million if you can confirm in a matter of days that you will do the deal. In other words it is a cash deal and is not available to you if you need to make it subject to raising financing or getting third party approvals that could be weeks out. You have a potential $25 Million dollar win available but must act fast.
Second, to get access to capital, you contact the corporate finance department at Research Capital and after a preliminary discussion you know that funding will be available. Lets say your stock is trading at $10 per share. You and Research agree that $75 Million will be provided to your company in 30 days in exchange for shares to be issued at a price of $9 per share, being a 10% discount to the market. In assessing the situation, you decide that getting a $25 Million win on the deal is worth the $10 Million hit you will take to your treasury ( being the discount plus fees to the brokerage firm) The net gain of $15 Million is good business as far as you are concerned.
You are an investor that wants to participate in new financings as they become available. You have informed me (your broker) that this type of financing is of interest to you. Buying currently listed company shares at a discount to the market price makes sense to you. In addition most bot deals are accompanied by a short form prospectus making the stock available to everyone rather than a Private Placement which is subject to a 4 month hold and only being available to "accredited investors". Although this approach is also used at times.
As such you have requested to be put on a priority list of person to be contacted when such issues come available. From the first email or phone call about the issue you will have only a few minutes to decide whether to participate in the issue. Information and time will be at a premium, but you know that the brokerage firm has puts its own capital on the line in committing to do this deal and they do not make this decision lightly. Based on this you are able to have a degree of confidence in biting off a certain amount of the issue. Obviously, experience, available funds , and the suitability of the investment within your investment portfolio, as well as other factors are important as well. For while there is no certainty on future price action, bot deals are usually only available to the better companies.
For the institutional investor, the bot deal allows for a "size" accumulation of stock. For the individual investor they get a position at a discount to where the stock had been trading. We do make the general leap of faith that the current market price of a security is the appropriate pricing for a security.
Lastly, from the brokerage companies perspective, the process results in a greater amount of business. The benefits to our clients results in good business. Corporation are attracted to the firm to do business and develop relationships and my clients are provided with a benefit in the form of lower cost of getting investment opportunity. This results in a competitive advantage over discount firms and small regional brokerage operations.
Usually the initial reaction to a bot deal is for the price of the security to declines upon the re-opening of the market. This is due to several reasons, supply of stock has been increased, thereby satiating short term demand and some investors pulling back demand looking for the new bottom pricing. Offsetting this effect is the deal benefit to the company and investors. In my example above the $10 Million cost should be more than offset by the $25 Million benefit. It is up to management of the company to explain this benefit and gain support for their actions.
Unlike the stock market, bot deals are not necessarily distributed on a first come first serve basis. Other factors come into play. History with the firm, participation history, size of orders etc, all establish a priority pattern. In general, larger orders established early and quickly gain priority over smaller orders that are indecisive.
As always, my clients are given a priority over pro or non-client orders.
If you are an investor and want to get first hand communication on the Bot deals Research Capital has to offer, please contact me.
Not all investments are suitable for investors. Please contact me to find out more on how Bot deals, or any other investment may fit within your portfolio.