An equity line of credit (ELOC, sometimes called a 'standby equity purchase agreement' or SEPA) is a contract where an investor commits to buy up to a dollar cap of stock from the company on demand, usually at a small discount to recent VWAP.
How it works
The company files a put notice for $X worth of shares. Over a pricing period (typically 1–5 trading days), the investor buys shares in the open market to hedge. At the end of the period, the company issues shares to the investor at, say, 97% of the VWAP across that window.
The investor pockets the spread between the open-market hedge and the discounted issue price. The company gets cash. The float gets bigger.
Why companies use them
ELOCs are cheaper and faster than a traditional follow-on, with no underwriting risk. The trade-off: the counterparty is continuously short against the company, which acts as a persistent drag on price.
Spotting an active ELOC
Look for a Standby Equity Purchase Agreement disclosed in an 8-K and an associated S-3 or S-1 registering the resale of those shares. The 10-Q will then disclose drawdowns under 'Issuance of shares pursuant to SEPA'.
Trading implications
ELOCs cap rallies because the company puts more aggressively when the stock is green and liquidity is there. The pattern: 20–40% intraday spike → fade by close as the hedge fills in.