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.