Anti-Dilution Provisions in a Warrant Offering

Warrants are an important vehicle for raising capital when more traditional financing sources are inaccessible. They also can serve as sweeteners to seal a deal with investors or other companies.

But warrants are also complex securities that can include exotic provisions. The resulting imprecision or ambiguity in understanding the key instrument terms can cause unexpected fair value measurements and accounting policy outcomes. More generally, they can upset the economics both parties thought they were signing up for.

In this Equity Methods white paper, we discuss the various features buyers and sellers can embed in warrant contracts and how the value of the warrant is sensitive to these features. In particular, we focus on the use of anti-dilution provisions that are designed to protect warrant holders from future equity offerings at lower implied equity values.