What happened

Shares of Roku (NASDAQ:ROKU) have dropped today, down by 8% as of 2:30 p.m. EDT, after the company disclosed in a regulatory filing that it has entered into an equity distribution agreement. The streaming TV specialist may raise as much as around $500 million through the deal.

So what

Unlike a traditional secondary offering, the equity distribution agreement is a form of private placement where banks (Morgan Stanley and Citigroup, in this case) help sell shares through "at-the-market" offerings. Roku will issue up to 4 million shares, and the financial institutions will earn a commission of 2% for shares sold.

Roku interface displayed on a TV

Image source: Roku.

The company says it intends to use the net proceeds for working capital and general corporate purposes such as operating expenses, repayment of debt, or capital expenditures, among other potential uses. Roku could also use the money to make acquisitions or investments but has no current commitments around those activities.

Now what

Roku had $590 million in cash on the balance sheet at the end of the first quarter, which included $70 million that it had drawn from a revolving credit facility. The tech company's advertising business is being impacted by the COVID-19 pandemic, which is hurting ad spending broadly as advertisers adjust to the public health crisis. In raising equity capital, existing shareholders will be somewhat diluted, although the extent of that dilution is not yet clear because it will depend on how many shares the company chooses to issue.