Shares of Ebang International Holdings (EBON 0.39%) plunged on Thursday after the blockchain technology company announced a new stock offering. As of 11 a.m. EDT today, the stock was down 13%.
For clarity, let's first explore Ebang's stock structure. The common shares of the China-based company are listed in the U.S. unlike many other international stocks. However, it has a dual-class structure of Class A shares and Class B shares. Class B shares get 20 votes each, whereas Class A shares only get one vote. But as far as determining the total share count, they count equally.
Now that we've explored the structure of Ebang stock, I believe today's news will be easier to digest. According to today's press release, Ebang is selling 14 million units -- not shares. Each unit the company sells will include one Class A share and one half-warrant. A full warrant entitles the holder to a common Class A share.
Unfortunately for Ebang shareholders, the company didn't get a good price. The units will be sold for $6.10 each and the warrants have an exercise price of $6.59 -- both below where the stock is right now even after today's plunge.
In my opinion, however, it's not just the poor pricing causing the drop in Ebang stock today. The ongoing problem is the rate of dilution since the company's initial public offering (IPO) in 2020. At IPO, there were roughly 134 million shares on a fully diluted basis. After the new offering that priced today, there will be almost 188 million shares outstanding -- a 40% increase in under a year. In other words, if you bought shares of Ebang at IPO, you now own 40% less of the company because there are more pieces of the pie than before.
There are several companies like Ebang right now, developing cryptocurrency and blockchain solutions and services from scratch. But this is a costly process and is being funded by diluting shareholders. For example, SOS Limited stock fell on Tuesday and The9 Limited stock fell on Wednesday after both reported stock offerings of their own.
As I've previously stated, the upside for all of these companies is that stock offerings do give management some much-needed cash to work with. That said, Ebang stock and others will be challenged as long as this stock-offering strategy continues to be used.