1. Big Discounts

This one can instantly evaporate shareholder equity in the company - capital raise discounts. When priced incorrectly, the company can often trade off $2 of equity value for $1 in funds raised, which makes the cost of funds incredible expensive. In most cases, the share price will trade immediately towards the capital raise price as investors see the 'fair value' that the incoming investors have placed on the company's stock.

Brokers usually try to request the maximum discount possible, as it makes the deal easier to sell to their clients and in turn, generate demand. After all, the brokers incentive is to execute the deal rather than get the best possible deal for the company.

Admittedly, not all price discounts can be negotiated by the company alone, and directors must also consider market conditions and company quality. However, it is also up to the company to identify the best raise structure and also the capability of the participating broker to achieve the best possible price.

If we look at Dateline Resources (ASX:DTR), we can see an example of a broker raise gone wrong for the company and their shareholders. On 2 March 2023, the company announced a capital raise of $2.71m at $0.02 with 1 free attaching option for every 2 shares subscribed for by incoming investors. If we break down the pricing, this was:

Not surprisingly, the share price quickly traded down below the offer price and floated below 2c for the next two months or so before recoveringly slightly. If we look at the impact to enterprise value:

As we can see, for just $2.71m, the company has almost halved their enterprise value. In other words, for every $1 raised, the company has evaporated $3.34 of shareholder wealth. Not a great deal. Furthermore, if we include the free attaching options issued to placement investors (67.75m), this further dilutes existing shareholders.

Definitely not a rollercoaster most shareholders want to experience.

2. Free broker options

Broker options is often a normal part of a capital raise service mandate. It aligns brokers with the common share price metric shareholders look at, and should the company become successful, gives them a small part in the fortunes created.

Yet, we must be careful that company directors are not offering unnecessarily large broker options to their service providers as they can be highly dilutive to shareholders and may even restrict the share price momentum.

After all, brokers should only be remunerated at a fair rate. An example of this is Melodiol Global Health (ASX:ME1), which was rebranded from Creso Pharma (ASX:CPH) in June 2023. The company has executed some generous capital raise deals with their house broker Everblu Capital over the years. Let's have a look at the free broker options that were issued during this period.

These are in additional to the usual 6% fee received on placement funds raised. Compared to the 412,094,336 shares on issued at the start of the period, the broker has received over over ~244% of the business in the form of free options. Although not all of the options is worth anything now, it does show the dilutionary impact of excessive broker options when management signs some capital raise mandates

3. High Fees

Capital raises usually cost in the range of 5-6% on funds raised. This cost often drops as the capital raise increases in size, usually stopping around the mid 1 percent range for blue chip capital raises i.e. ASX50 companies. Yet, it must not be assumed that all capital raises have a standard fee structure as it is up to the broker and company to mutually agree on. As investors, we must examine the size of fees that have been paid in the past to determine if the management have acted faithfully in negotiating competitive terms.

Aspermont Limited (ASX:ASP) conducted a standout capital raising on 3 March 2021. The company raised $3m at $0.03 per share in a placement to a German investor. This was well priced given the prevailing share price was circa $0.029.

Yet, if we examine the attaching Proposed Issue of Securities, we see that the company used Wealth Express Holdings Group Limited as the lead manager and paid a huge 20% of the total placement as fees. This is well over 3x the usual rate for capital raises.

Closing considerations

Although brokers are an integral part of the ASX ecosystem, investors should always remain vigilant about the fairness of the equation. Needless to say, brokers will always try to access a more profitable capital raising service mandate and it is up to the company to ensure that the value received outweigh the costs associated.

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