Using Dividend Reinvestment Plans and Direct Stock Purchase Plans to raise capital

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Using Dividend Reinvestment Plans and Direct
Stock Purchase Plans to raise capital
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BACKGROUND

• Dividend Reinvestment Plans, or DRPs for short
  have been around since the early 1970s.
• The first nationally known companies to offer
  them were Allegheny Power, followed by ATT.
• Both companies realized that it was a good
  shareholder benefit. They also realized what a
  very cost-effective way it could be to raise
  equity capital.
• Within a year or so, virtually every electric and
  gas utility in the country had such a plan.
• Meanwhile, by popular demand, DRPs/DSPPs were
  spreading to a wide variety of dividend paying
  companies.

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Types of Plans

• DRPs that allow the sponsoring company to raise
  new capital through the plan must be registered
  with the SEC, along with the shares being set
  aside for the Plan.
• A plain vanilla DRP/DSPP where all the shares
  are purchased by the plan agent in the open
  market need not be registered.
• In March of 1997, the SECs Reg-M allowed
  transfer Agents to offer Bank Sponsored DSPPs
  to the general public.
• These plans are so common that most corporate law
  firms dont have to reinvent the wheel.
• Companies can register their DSPP on Form S-3 so
  long as they have at least 75 million in market
  capitalization (held by non-control persons).

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DSPP Discounts

• DSPPs with discounts allow participants to buy
  stock directly from the company at a discount to
  the market price.
• Companies that offer a discount increasingly have
  sliding scale discounts.
• Some companies are also using waiver options in
  their plans.
• Many companies offering discounts have instituted
  multi-day pricing periods that are used to
  determine the purchase price that receives the
  DRPP discount.
• Another characteristic of discounted DRPPs is
  threshold pricing. A threshold price is the
  lowest price the firm will use during a pricing
  period.

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Advantages Disadvantages

• One of the biggest benefits a DRP / DSPP provides
  is a source of cheap equity capital.
• Raising capital through DSPPs can mitigate the
  negative price effects associated with secondary
  stock offerings.
• A DSPP is an effective equity-raising tool
  because of their flexibility.
• Another potential benefit of DRPs is that they
  facilitate continuous buying activity in the
  company's stock.
• Changing capital-raising conditions favor DSPPs.

• Arbitrageurs may engage in dividend-capture
  schemes or quick ins-and-outs with optional
  cash, which can cause unwanted stock price
  volatility if issuers fail to apply appropriate
  road blocks.
• Investors can't dictate the stock prices at which
  they buy stock in these plans.
• The discount may have an effect of diluting the
  stock price.

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Marketing Competitive Advantage

• DRPs/DSPPs can be effective marketing tools for
  companies.
• Companies like small investors because they help
  to stabilize the stock price.
• A related benefit is that small investors tend to
  be more loyal to company management.
• In late 1994, the SEC permitted Issuers who
  registered their plans to offer them to any
  interested party who found out about the plan and
  requested appropriate written materials.
• Make sure the features and benefits of your
  offering are communicated clearly and that the
  benefits come across as compelling.

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QUESTIONS ?