Reserve equity financing constitutes a form of investment in which a large company or investing firm enters a relationship with a smaller company. This relationship provides liability coverage for small or developing firms while allowing these companies to raise money through equity. Reserve equity financing allows for a greater degree of freedom on the part of companies receiving investments than do other forms of financing and constitutes a growing field in the 21st century.
Equity Financing
Equity financing entails raising operating capital through the issuing of stocks. This occurs in myriad ways in the world of business financing. Venture capital firms, for instance, invest large sums of capital through the purchase of majority shares at the inception of a business in order to generate capital through returns. In other instances, companies raise money by publicly trading equity through the stock market. In other equity modes, large companies invest in small companies by purchasing large sums of stock, sometimes enough to become majority owner and influence the decision-making process of a company.
Reserve Equity Financing
Reserve equity financing constitutes a specialized form of equity financing in which an investment firm enters into a long-term relationship with a fledgling or otherwise small company looking to develop and generate capital through public markets. Unlike standard equity investment relationships, firms providing funding through reserve equity financing do not take control of the smaller firm, but simply provide financial assurance to use as leverage in trading equity. In 2011, for instance, investment firm AGS Capital Group invested $50 million in USA Synthetic Fuel Corporation through reserve equity financing. USA Synthetic Fuel does not get this money directly, but rather receives a $50 million foundation for which it may create and sell equity. Basically, the investor creates a reserve of capital from which to create equity.
Benefits of Reserve Equity Financing
Reserve equity financing provides various benefits to small firms, primarily by altering the traditional power dynamics found in investor-investee relationships. When a small business receives reserve equity financing it holds the power to create publicly traded shares in the manner it sees fit. It may also sell shares when it chooses to optimize the market value of shares and thus maximize return of capital on the initial investment. Furthermore, reserve equity financing relationships allow the small business receiving investment funds to spend money as chooses. Even if an investor places enough money in a small firm to purchase a controlling interest in that company, the firm doesn't actually hold a controlling interesting or any authority over expenditure and equity sales because it does not actually own equity. Rather, it provides in effect liability coverage for the sale of equity through invested capital.
Additional Information
Reserve equity occurs only when a small business does not possess the resources to publicly trade equity. The relationship allows for the creation of equity and thereby hopes to provide a source of long-term funding and operating capital. With this capital, small businesses develop stability and increased streams of revenue. Before final approval occurs on reserve equity financing deals, the investee must file for permission to publicly trade with the Securities Exchange Commission with Form S-1. Small businesses seeking reserve equity financing may do so through equity investment firms. Instances of reserve equity financing in 2010 and 2011 show a strong trend of funding progressive ventures such as art organizations, technology companies and alternative energy and energy solutions firms through this method.
