In a recently filed proxy statement for its upcoming annual meeting on July 12, SoFi (SOFI -0.56%) revealed that shareholders would vote on an amendment to grant the company's board of directors discretionary authority to conduct a reverse stock split sometime over the next year. Stock splits, in general, can certainly draw interest from the market, and not always in a positive way.
Let's take a look at exactly what shareholders will vote on at the upcoming meeting and what a reverse stock split could mean for SoFi shareholders.
What is the proposal?
To be clear, shareholders are not voting on whether the company should conduct a reverse stock split. They are simply voting on whether to give the board the power to institute a reverse stock split sometime over the next year if the board deems it in the company's best interest. It's possible the board will decide not to go through with it even if granted the authority.
As a refresher, a reverse stock split is when a company decreases the number of outstanding shares in an effort to boost the stock price. During a traditional or reverse stock split, a company's market capitalization does not change. For example, if you owned nine shares of SoFi at around $8 each for a total value of $72, and SoFi chose to conduct a 1-for-3 reverse stock split, you would exchange your nine shares at $8 each for three shares valued at $24 each. Following the split, you still own $72 of SoFi, but three shares instead of nine.
SoFi, in its proxy statement, said any kind of reverse stock split would reduce the company's outstanding shares by a ratio of between 1-for-2 and 1-for-10. Even if shareholders approve the amendment in July, I will reiterate that it could still be months before SoFi does reverse split, and it may not happen at all.
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Why is SoFi considering this?
In its proxy statement, SoFi lists three main reasons for a reverse stock split. The first is to generate greater interest for the stock by appealing to a wider range of investors. The company notes that a higher share price may make the company more attractive to brokerages or institutional investors that do not recommend low-priced stocks to their clients or do not hold low-priced stocks. Institutional investors are investors that can really move the needle on a stock. SoFi also said a higher share price might increase analyst coverage.
The second reason cited by SoFi is to "improve the perception of SoFi Common Stock as an Investment Security." This seems similar to the first reason, where SoFi says that lower-priced stocks are naturally viewed as riskier and more speculative assets, a problem that is exacerbated by economic uncertainty and these kinds of volatile market conditions.
SoFi's last main reason for considering the reverse split is that a higher stock price may draw in new talent and partnerships. Stock prices are an important indicator of financial strength, so perhaps management feels they are losing out on talent and partnerships because of the low share price.
Would a reverse stock split be a good thing?
Reverse stock splits are typically viewed negatively by the market because they are often done by companies that don't think they can get the stock price up organically. At the end of the day, they don't change the company's market cap, fundamentals, or business model. However, I do find it a little odd to see SoFi considering a reverse stock split right now.
SoFi has plenty of analyst coverage, improving financials, and a lot of positive sentiment overall among investors, despite the sell-off. There is still plenty of time for SoFi to back out if sentiment turns extremely negative over the issue, but I will be looking for more answers leading up to the annual meeting and at the event itself regarding why the company thinks they need to do this.
