Prepaid advance
Also called: pre-paid advance, prepaid advance agreement, PPA
A financing where an investor pays the company cash up front and is repaid mainly in newly issued shares, usually priced at a discount to recent trading.
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How it works
Under a prepaid advance agreement, an investor advances a lump sum, often at a small original issue discount (for example, paying $4,750,000 for a $5,000,000 advance). The company then repays the balance by issuing shares to the investor over time. The share price for each repayment is usually the lower of a fixed price and a percentage of a recent VWAP over a short window, with a floor price in some agreements.
Prepaid advances are often paired with an equity line from the same investor: the company can repay the advance with shares from the line, or draw new advances later. The investor's resale of the shares is typically registered on an S-1 resale.
Why it matters
Economically, a prepaid advance behaves much like a convertible note with variable-price conversion. The company gets cash immediately, but the number of shares it ultimately issues depends on the share price during repayment. Agreements often require cash payments, sometimes with a premium, if the price stays below the floor for a period, and may include monthly repayment obligations.
Worked example
Hypothetical: Company X receives $4,750,000 for a $5,000,000 advance. Repayment shares are priced at the lower of $3.00 or 94% of the lowest daily VWAP over the prior three days.
| Lowest VWAP | Repayment price | Shares to repay $5,000,000 |
|---|---|---|
| $3.50 | $3.00 | 1,666,667 |
| $2.00 | $1.88 | 2,659,575 |
| $1.00 | $0.94 | 5,319,149 |
All figures are hypothetical.
How to spot it
Look for an 8-K under Item 1.01 describing a "Pre-Paid Advance Agreement" or "PPA", with the agreement as an exhibit, and a later S-1 registering shares for resale by the investor. See Prepaid advances.