Securities Purchase Agreements Aren’t Always a Good Sign for Stock Prices

At times, a public company enters a securities purchase agreement with an investor. The agreements aren't always a good sign for stock prices. Here's why.

Rachel Curry - Author

Mar. 28 2022, Published 2:50 p.m. ET

Public companies sell equity in the form of stocks, but it isn't just everyday retail investors who can access that stock. Institutional investors will often buy or reserve a large bundle of a company’s stock. Sometimes, these investors will enter into securities purchase agreements with companies, which usually involve a plan or right to purchase equity over time.

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Due to the fact that investors are buying more stock, securities purchase agreements (stock purchase agreements) seem like they can make stock prices swell. However, that isn't always the case. Sometimes, a securities purchase agreement is a red flag.

What are securities purchase agreements?

When an investor agrees to purchase a specified amount of stock over a set period of time, the investor and the company they’re investing in will enter into a formal agreement. This is called a securities purchase agreement. Sometimes, it's also called a stock purchase agreement or SPA.

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The agreement lays out the number of shares the investor plans to buy and at which price they’re buying the shares. The investor may be a premium or institutional investor.

Stock purchase agreements can be for public or private companies.

Both public and private companies can enter into securities purchase agreements with investors. If the company is private, the deal will go through as a private equity transaction. If the company is public, it may base the agreement on common stock or other securities (or even a combination thereof).

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Securities purchase agreements may cause stock prices to fluctuate one way or the other.

For public companies that sell a large amount of stock through a securities purchase agreement, stock prices can increase or decrease depending on the situation.

Stock price increases resulting from securities purchase agreements are typically based on two factors. First, the increased purchasing activity pushes the value of the stock up. Second, retail and other institutional investors may view the stock in a more positive light due to the generally favorable sentiment of a large stock sale, thus spurring more stock purchases.

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securities purchase agreement
Source: istock
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Note that this increase may not be immediate. A securities purchase agreement often takes place during a spread-out time period.

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Additionally, some agreements only give the investor the right to purchase the stock. In this case, the investor decides whether or not they wish to exercise that right. If they don’t exercise the right, the buying volume won't increase.

In some cases, a securities purchase agreement comes after a bear run for the stock and serves as an attempt to propel the stock price. In this case, its intent is similar to a reverse stock split, in which a penny stock may reduce the number of shares but increase each one’s value to stay relevant or remain listed on a major stock exchange.

As you can see, there's a myriad of causes and effects of securities purchase agreements. Do your due diligence and look for circumstantial information that will lead you to an educated decision on whether a stock is likely to increase, decrease, or remain the same after signing a stock purchase agreement with an investor.


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