Licensed Dealer in Securities AFS License No: 238699

Date:

Share Purchase Plans

The market contains many opportunities and each carries an appropriate level of risk. Whenever we find a relatively Low Risk/High Reward investment, large market participants and institutional investors quickly take it up, increasing its price and therefore removing most of the reward. One opportunity we have discovered, which large market participants and institutional investors cannot benefit from, involves Share Purchase Plans.

A Share Purchase Plan (SPP) offers shareholders in a company the opportunity to purchase additional shares in that company, free of brokerage. They are usually offered at a discount to the current market price and the maximum each shareholder can take up is $15,000 worth. Institutions and large shareholders are not interested in $15,000 worth of stock so they never look at these offers.

Companies use SPP’s as one of a few alternative ways to raise funds. They are the preferred method as, under the plan they are not required to lodge a prospectus with ASIC. In comparison, an alternative, Rights Issues, can cost companies in excess of $100,000 to issue such a prospectus.

Most shareholders have seen profitable results by applying for discounted stock through the SPP’s in blue chip stocks they already hold. However, few shareholders know of the potential rewards of searching for all available SPP’s and taking up the ones, which provide a great enough return.

It is not uncommon for companies to offer SPP stock at a 15 – 20% discount to their current market price. It is also not uncommon for these companies to leave a window of one or two days where we can become a shareholder and take up their offer.

The Share Purchase Plan Strategy

The strategy DFS Equities uses for its clients is as follows:

  1. We stay informed and notify our clients by email of any companies offering additional stock through an SPP at a 10% or more discount to their current market price, AND which leave a window of time of sufficient duration to allow us to become a shareholder and qualify for the offer.
  2. To become a shareholder, we purchase just $500 worth of stock for each client who has elected to participate and has emailed us to confirm. Under ASX Business Rules each shareholder’s initial purchase in a company cannot have a value less than $500.
  3. The client waits for the SPP offer document to be sent from the company’s share registry. During that time we keep an eye on the underlying company’s share price.
  4. If the price remains flat or rises, thus providing a high probability of a 10%+ premium through the SPP, the client takes up the SPP offer and posts a cheque back to the company for up to a maximum of $15,000 (most clients elect to fully participate).
  5. The company usually takes 1 – 3 weeks to process the SPP application and allocate the stock and we generally sell the stock out on allocation date. Assuming the share price did not change significantly during the time it takes for the company to process our applications, we usually make a minimum return of 10% on our investment over 1 – 3 weeks.

The advantage of having to invest only $500 originally to qualify for the SPP is that if the underlying stock price starts falling or showing signs of weakness during the time it takes the client to receive the SPP documentation, the client simply does not take up the offer for up to $15,000 worth of additional stock, and we may lose just $100 or $200 on the initial $500 investment.

Acceptances for SPPs often come in two forms; “first in, first served”, and “scale – back”.

First in, First served

Under this arrangement each client receives the full amount of SPP stock they apply for, but they have to ensure they get the documentation in early, often before the close – off date.

Scale Back

In this instance, the company will accept all applications up to closing date but they will scale back the number of shares allocated if the offer has been over subscribed.