A GEM Digital subscription drawdown. Here’s a simplified explanation of how it works in the context of a $336 million USD facility like the one currently available to Cunningham:
Key Components of a GEM Subscription Drawdown
1. Equity Commitment
GEM commits to provide the company up to $336 million USD in capital over a specified period (e.g., 3 years). This is not provided as a lump sum but through a subscription drawdown process, where funds are made available incrementally.
2. Subscription and Drawdown Process
• The company can request or “draw down” funds as needed, up to the total commitment amount, within the agreed period.
• For each drawdown, GEM subscribes to new shares in the company. These shares are issued at a price determined during the drawdown period.
3. Share Pricing Mechanism
• The share price is usually based on a discounted volume-weighted average price (VWAP) over a period before the drawdown, often 5 to 15 trading days.
• This ensures that the pricing reflects the current market conditions while offering GEM a slight discount as an incentive.
4. Flexibility for the Company
• The company has control over the timing and amount of each drawdown, based on its capital needs.
• There’s no obligation to draw down the full $336 million if the company doesn’t require it.
5. Dilution Impact
• Every drawdown results in GEM receiving shares, which can dilute existing shareholders.
• The company must carefully manage this to avoid significant negative effects on its share price.
6. Use of Funds
• The funds can be used for various purposes, such as scaling operations, financing growth initiatives, or paying down debt, depending on the company’s strategic goals.
Advantages of a GEM Drawdown Facility
• Flexible Access to Capital: Funds are available as needed, reducing the burden of upfront financing.
• No Fixed Debt Obligations: Unlike loans, there are no mandatory repayments; GEM is paid through equity.
• Market-Driven Pricing: The pricing mechanism aligns with current market conditions, ensuring fair valuation.
Potential Risks
• Dilution: Frequent or large drawdowns can significantly dilute existing shareholders, potentially impacting the share price.
• Market Dependency: If the company’s stock price declines, the amount of capital raised per drawdown will decrease, potentially requiring more shares to be issued.
• Investor Sentiment: The market may view such facilities negatively if not managed transparently, as it could signal cash flow issues.
Example Workflow
1. Commitment Period: The company signs an agreement with GEM for up to $336 million over, say, 36 months.
2. First Drawdown: The company requests $10 million.
• GEM calculates the share price using a 10-day VWAP with a 10% discount.
• Suppose the VWAP is $1.00/share. GEM gets 11 million shares ($10M ÷ $0.90).
3. Issuance of Shares: The company issues the shares to GEM, and GEM transfers the $10 million.
4. Repeat Process: The company can draw down more funds as needed, subject to terms and