If you`re interested in the world of finance and investing, you may have come across the term “standby equity distribution agreement” (SEDA) on Investopedia. But what exactly is a SEDA, and how does it work?
A SEDA is a type of financing agreement between a public company and an investor or group of investors. This agreement allows the company to issue new shares of its stock to the investor(s), who will then sell those shares on the open market over a period of time.
The key feature of a SEDA is that it provides the company with a guaranteed source of funding. The investor(s) agree to purchase a certain number of shares at a predetermined price over a set period of time, giving the company a predictable cash flow stream. This can be especially helpful for companies that need to raise funds but may not be able to do so through traditional methods like bank loans or public offerings.
One of the benefits of a SEDA for investors is that it provides them with a way to invest in a company without having to take on the risk of ownership. Because the investor(s) are selling the company`s shares on the open market, they are not involved in the day-to-day operations or decision-making of the company. This can be a more passive form of investing for those who don`t want to take on the responsibilities of a shareholder.
However, there are also risks associated with a SEDA. For example, if the company`s stock price falls significantly below the predetermined price at which the investor(s) agreed to purchase shares, they may be left with a significant loss. Additionally, the sale of shares by the investor(s) can put downward pressure on the company`s stock price, which could negatively impact existing shareholders.
Overall, a SEDA can be a useful tool for companies and investors alike. However, as with any financial agreement, it`s important to thoroughly understand the terms and risks involved before signing on the dotted line. If you`re considering investing in a company through a SEDA, be sure to do your due diligence and consult with a financial advisor to ensure that it aligns with your investment goals and risk tolerance.