Introduction to Warrants and Their Issuance Process

A warrant is a financial instrument that confers the right to buy stock at a specific price before expiration. Unlike options, warrants are issued by the company itself, usually to attract investors.

The issuance starts with the company’s board approval, followed by setting terms like exercise price, expiration, and quantity. Legal compliance is crucial, involving prospectus drafting and regulatory filing.

Pricing involves the Black-Scholes model or binomial models considering factors such as stock price, strike price, volatility, time, and interest rates. Market demand can also affect initial pricing.

Underwriters evaluate the risk, manage the issuance process, and sometimes guarantee a minimum subscription level. They play a key role in determining the success of a warrant issue.

Issuing warrants can dilute existing shareholders' equity. Companies must balance raising capital with the potential market impact, including stock price dilution and investor perception.

Investors exercise warrants to buy shares at the strike price. This can be cash-based, requiring payment, or cashless, converting the warrant’s value directly into stock.

Warrant issuance differs from stock options in origin, tax implications, and market trading. Warrants can have a longer lifespan and are typically traded over-the-counter or in secondary markets.