What Are Warrants & How Do They Unlock Capital?

What exactly is a 'Warrant"?

Warrants are a derivative that give the right, but not the obligation, to buy or sell a security at a certain price before an expiration date. The most common type of security is equity or a common share.

Companies can leverage warrants when executing a capital raise, to offer multiple security types - a typical structure often includes what is referred to as a Common Share and a Warrant.

There are two types of warrants - a call warrant and a put warrant. Call warrants are the most common found in capital raise offerings. A call warrant is a security type which allows the purchaser to buy more securities in the future, at a predetermined exercise price. An investor can “exercise” their warrant by using it to purchase more securities before the “expiry period”, after which it cannot be exercised. Put warrants give the holder the right to sell an underlying asset for a specified price on or before a preset/expiration date.

Note: warrants do not pay dividends or come with voting rights. Investors are attracted to warrants as a means of leveraging their positions in a security, hedging against downside (for example, by combining a put warrant with a long position in the underlying stock), or exploiting arbitrage opportunities.

Key components of a Call Warrant:

  • Strike or exercise price: The price at which the investor can purchase shares of stock based on the terms of the warrant. This is also known as the pricing mechanism. 
  • Expiration date: This is the last day you can exercise a warrant.
  • Warrant price: This is the premium the issuer charges to purchase the warrant. It's usually set as a price-per-share and provides capital to the issuer upon sale.
  • Warrant shares: This is the number of shares the holder can purchase when exercising the warrant and the method of how they will be calculated.   

Advantages to including warrants in your raise:

Using warrants in pre-IPO capital raise offerings provides companies/issuers with the opportunity to unlock more capital at a future date with very little extra effort. Depending on the exercise period, warrants ultimately extend the time horizon for potentially raising equity - which allows the issuer to raise more capital. In pre-IPO offerings, warrants can be viewed to investors as a “sweetener” or an extra incentive for being one of the first to invest since they are speculating that when getting in early the future share price will appreciate and make their exercise favorable. Warrants are also a great mechanism for issuers to keep their investor base engaged and involved in the company. 

Exercising Warrants 

Traditionally, retail investors have been limited by a manual process to exercise their warrants, leading to many investors simply not exercising their warrants by the expiry date because ultimately it was a larger pain than the benefit it yielded. Due to this challenge, capital-raising companies have often opted not to include warrants in their equity crowdfunding campaign. DealMaker has transformed this manual process with our industry leading Warrant Portals which offers investors a seamless fully-digital experience to exercise the warrants they hold, leading to higher conversion and unlocked capital for issuers.

Our process automation sends out reminders to investors to exercise their warrants prior to the expiry date and ensures that expired warrants are unable to exercise. With a fully integrated solution, DealMaker acts as your warrant agent, transfer agent, and also provides a concierge service for smooth set-up and enhanced ongoing support.

DealMaker’s Warrant Portals saw issuers raise nearly $20M of additional capital in the past year

Investors do in fact like the option of warrants, with many viewing it as a sweetener on the deal. The major pitfall in warrants for investors has been the cumbersome avenues previously needed to execute on them. With the right tools in place to execute warrants efficiently, they can offer issuers access to untapped capital and can be a fundamental tool in growing their business. 

“The foregoing is market commentary only. Any market participant should do their own research and make informed decisions with their own advisors to make sure the particulars of their capital raise are correct for that particular issuer in that circumstance.”

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