MS warrants are stock acquisition rights whose exercise price is adjusted in line with the share price, accelerating new share issuance when the share price rises. We outline three checks for assessing measures to limit the expansion of potential shares and the actual use of proceeds, along with examples of companies that currently have MS warrants outstanding.
MS warrants use a mechanism under which the exercise price is adjusted daily based on the share price, making it easier for the allottee to acquire shares below the market price when the share price rises. As a result, new share supply increases during periods of rising share prices, creating a situation in which shareholders must consider both dilution and selling pressure.
The regulatory framework has imposed monthly exercise limits on instruments such as MSCBs, with operations based on keeping the increase in the number of shares within a certain percentage. However, exceptions may be permitted when the exercise price is at or above the closing price on the date of the issuance resolution, and large-scale exercises can accumulate when the share price rises. In the case of Fujicopian, the number of shares delivered during the month increased sharply in September, and the company announced that all remaining shares had been exercised by October.
There are three key points to check. The first is the dilution ceiling, or how much the number of shares could increase at most. Dividing the total number of potential shares by the number of shares outstanding gives a dilution rate of less than 10% for limited impact and 25% or more for significant dilution. The second is the design of the instrument, including the discount rate, floor exercise price and exercise suspension provisions. The third is the specificity of the use of proceeds and how the funds are actually applied, including whether they contribute to business growth.
In actual cases, HitoMile Co.,Ltd. uses a structure that controls the pace through exercise suspension designations; Fujicopian uses a method that sets the floor at different share price levels and encourages exercise in stages; and FIXER uses a structure that sets the floor above the share price at issuance and acquires and cancels the rights partway through. TORICO issued MS warrants to fund cryptocurrency investments, while Delta-Fly Pharma adopted a structure designed to meet its funding needs despite an extremely high dilution rate. The combination of instrument design and use of proceeds differs from company to company.