The rich get rich, and those not in the group are the ones left paying up so it stays that way.
It feels a bit like the war cry of the leading Democratic candidates, whether you agree or not. There's definitely some truth to it on Wall Street although, he who has the gold makes the rules, might be a better take.
If you want a perfect example of this, look at two recent capital raises: one from Tesla (TSLA) and one from Genprex (GNPX) over the past week. Tesla raised a little over $2 billion (net) selling shares at a discount to market around 4.6% and paid 1.1% in fees to the underwriters. Genprex raised just over $16 million (net) selling shares at a discount to the prior day's close of 28.5% and paid fees of 7.5% to the underwriters.
This is a case where both can absolutely benefit from the money. I actually thought Tesla was a bit too slow in their raise, but they did it correctly, whereas I believe Genprex followed its January raise too quickly despite the big run in the stock.
Tesla's capital raise wasn't overly diluted, served a clear near-term purpose easily understandable to investors, offered a reasonable discount, and came with two big-name, recognizable buyers participating in the offering. Genprex's offer came on the heels of two previous offers in the past two months, one of which was panic-induced, had a huge discount, and compensated the underwriters a pretty penny.
The billion-dollar companies get to work with Wall Street generals who command an army of financially well-minded soldiers. Small companies, especially microcaps, are left to the chop shops, crews more car salesman than disciplined leaders. They are banging the phones to prospects saying, "What do I have to do to get you into this small-cap stock offering today?" At the same time, they are telling the CEO whatever they have to say to get the deal done. It's how they earn a living and may be the closest thing to the old school boiler room that remains.
I believe Genprex fell into this trap with Wednesday's offering of five million shares at $3.50 for gross proceeds of $17.5 million.
Let me start by saying, I get it. Even after netting roughly $7.36 million from the January 28th raise and another million in December, the company's stock recently caught fire. With shares closing at $4.90 on Tuesday, they were well above the $1.05 level from the January offering. Anyone familiar with small biotech companies conducting early trials knows they need money. A lot of it. Like I said, I get it.
But I see two mistakes here. Neither can be changed because what's done is done, but they may offer a lesson for the future for companies willing to learn. One of these lessons may be very damaging if it plays out, the other is more for investors, but I have to think the end game comes down to who is advising these companies, especially the smaller ones.
On Wednesday morning, shares of Genprex danced around $6 in the pre-market, well above the previous day's close of $4.90. Momentum traders continued to buzz about its potential. We've seen the momentum train run crazy on several names lately including Tesla and Virgin Galactic (SPCE) . It's around this time the chop shop, I mean underwriters, are screaming at the CEO, "Sell now!" They might argue the volume is there for a huge raise, more money than you dreamed you could get. Do it now. The stock could drop tomorrow (and it could have). Put your worries at ease.
But this is where I think small companies falter. No, they can't afford a Wall Street army, but I bet one or two seasoned active traders signed with an NDA and a no-trade agreement on the stock could work as strong consultants. Bring in someone who understands how trading and momentum work who aren't concerned with earning a commission, but rather earning their place by supplying solid advice or at least an unbiased viewpoint.
I'd be willing to bet most of them would have advised the company to wait a few days. Don't fight the trend. I bet the market would have carried shares to $6.50 yesterday, maybe even $7.50 by the end of trading this week. The company might have had the chance to raise the $17.5 million in the $5 to $6 range if we assume a similar discount to the one they used.
That's a kick in the no-no zone for every long-term holder of the stock. The good news is as long as shares hold above $3.50, although I'd prefer $4, then the company has the money it needs to operate through trials for several years, and we can view the $3.50 to $4.00 range as a floor. Should shares close below $3.50 then management will have broken the stock for a second time. The first time occurred on the very first offering shortly after the IPO. It took 18 months to "recover" from that first one. If this breaks again, then chances are it will be dead money and drift into the $2.50 range as it trades to only a small premium against cash. It doesn't deserve that, but that's how momentum works. It holds a grudge.
The existing warrants from the recent raises could present a challenge as well. Those will unlock in four to six months at prices much lower than the current price, so if momentum and strength waver, those warrants could be exercised and sold putting some pressure on the stock. That's not necessarily terrible news for the company as it will add some more cash to the treasury.
I did mention a lesson for traders, and it's this: Pavlov. Most people know of the famous experiment. Ring a bell, feed the dog. Once conditioned, the dog will salivate whenever it hears a bell ring. Okay, so that's an over-simplistic version of the experiment, but traders are now conditioned to expect Genprex to raise money any time the stock spikes.
December: It moved from $0.30 to $1.00. Raised money.
January: From $0.45 to $2.00. Raised money.
February $1.40 to $4.90. Raised money.
If this were to settle between $3 and $4, then spike to say $7, what do you think the expectations of traders will be? A condition is now set in place.
Management has potentially capped every near-term rally because there's not enough justification to the recent capital raise. Not at that price. Above $7? Heck yeah. Above $5? Absolutely. Discounting 25% while the stock is still on an upward trajectory and below the initial IPO? Chop shop bush league.
There's a lesson here for both management of small companies and investors. The question becomes: will anybody learn it?