A pre-funded warrant is a type of warrant that allows its holder to purchase a specified number of a company's securities at a nominal exercise price, typically as low as $0.01 per share. The term "pre-funded" refers to the structural feature that allows the company to receive, as part of the pre-funded warrant's purchase price, the exercise price that would be due for a traditional (not pre-funded) warrant, except for the nominal exercise price, at the time of the warrant's issuance instead of at the time of the warrant's eventual exercise. Pre-funded warrants are generally issued as part of a larger financing transaction, such as a venture capital investment, minority equity investment, or mezzanine financing. A pre-funded warrant provides a holder with the flexibility to avoid exceeding the designated ownership threshold prior to the warrant's exercise while still maintaining the ability to immediately acquire the underlying securities at a nominal exercise price when the investor is ready to do so. Pre-funded warrants allow the company to receive almost all of the cash proceeds immediately upon the warrant's issue at a time when the company's underlying valuation is likely difficult to obtain or uncertain, instead of waiting until the warrant is exercised. In our "Practice Pointers on Pre-funded Warrants," we describe the features of pre-funded warrants, discuss why they are used, how they are structured and 20% rule considerations, and provide sample pre-funded warrant language.
The practice pointers are available here.
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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