How Equity Line Financing (SEPA) Actually Works

Isn't this just a follow-on offering? Not quite. A traditional follow-on prices and closes in a single transaction. A standby equity agreement is a standing commitment: the investor agrees upfront to purchase shares over a draw period, often a couple of years, whenever the company sends a draw notice, without negotiating price or size deal by deal. The company controls the timing and amount of each draw; the investor is obligated to fund it once the notice is sent, subject to the caps in the agreement.

The company sends a draw notice specifying an amount, subject to whatever maximum the agreement allows per draw. A pricing period follows, typically a handful of trading days, during which the purchase price is calculated as a discount to the volume-weighted average price over that window rather than a single day's close. Shares are then issued and the investor wires the proceeds, usually within a few business days of the pricing period closing.

The sequence, from preparation to settlement:

1. Confirm the shares are registered, or covered by an effective registration statement, because the investor needs to be able to resell them.
2. Send a draw notice that specifies an amount, up to whatever per-draw maximum the agreement allows.
3. Wait through the pricing period of a handful of trading days, during which the purchase price is calculated as a discount to the volume weighted average price.
4. Learn the final price and share count only after that period, since both are calculated from trading that happens after your notice.
5. Check the ownership cap and any floor price, which can limit how much you can draw when the stock price is low.

The company doesn't know the exact price or share count when it sends the draw notice, because the price is calculated from trading over the pricing period that follows. This protects the investor from committing to a fixed price weeks in advance in a volatile stock, but it also means the company is choosing an amount to raise without knowing exactly how many shares that will cost until the pricing period closes. Companies that draw during a period of unusual share price weakness end up issuing more shares for the same dollar amount than they would in a stronger stretch.

The shares an investor receives in a draw need to be registered, or covered by an existing effective registration statement, before the investor can resell them. Getting a registration statement declared effective by regulators takes real time and isn't guaranteed on a specific schedule, and a company that signs a standby equity agreement assuming it can draw immediately is often surprised that the first draw has to wait on this process.

Once the agreement and registration are in place, routing the draw notices, officer certificates, and closing documents through a checklist tool like Process Street and an e-signature platform like Foxit eSign keeps each draw's paperwork consistent instead of reinvented from scratch every time.

Most agreements cap the investor's total ownership at a set percentage of outstanding shares, so the investor isn't forced into an unwanted large stake, and this cap can limit how much you can actually draw at once if the stock price is low. Many also include a floor price below which the company can choose not to draw, protecting against issuing an enormous number of shares at a depressed price.

Read both provisions against your actual capital needs before you sign, not just the headline total commitment size, since the ownership cap and floor price together determine how much cash you can realistically access at any given share price.

Also check what happens to unused capacity as the draw period runs out. Some agreements let you extend the arrangement or negotiate a fresh one once the original term expires; others simply let the standing commitment lapse, which matters if you were counting on it as a backstop for a specific future need rather than capital you planned to draw right away.