SWORD-financing
Encyclopedia
SWORD-financing is a special form of financing invented to help young biotech companies access capital to finance their R&D via establishing SPE
(special purpose entity).
Innovation
is vital to biotech firms. However, uncertainty
of the commercial viability and regulatory approval of new products and technologies makes innovation
a very risky undertaking. Conventional internal financing of innovation is generally not possible because biotech firms tend to be small with meager profits and few cash
resources. SWORD financing is used to encourage innovation by diversifying risk
across wide financial markets. SWORD provides investors an opportunity to identify and finance underfunded, yet attractive projects. An SPE acts as an intermediary between the parent company and the investors, separating the project from the existing liabilities of the parent company. To provide flexibility and liquidity for all the parties, an SPE issues special securities (units) and raises finance via public or private offerings. In essence, one unit is a portfolio
consisting of one share of SPE’s equity, one warrant
to purchase a share of the parent firms' common stock, and a call option
for the parent firm to buy back shares of SPE.
Special purpose entity
A special purpose entity is a legal entity created to fulfill narrow, specific or temporary objectives...
(special purpose entity).
Innovation
Innovation
Innovation is the creation of better or more effective products, processes, technologies, or ideas that are accepted by markets, governments, and society...
is vital to biotech firms. However, uncertainty
Uncertainty
Uncertainty is a term used in subtly different ways in a number of fields, including physics, philosophy, statistics, economics, finance, insurance, psychology, sociology, engineering, and information science...
of the commercial viability and regulatory approval of new products and technologies makes innovation
Innovation
Innovation is the creation of better or more effective products, processes, technologies, or ideas that are accepted by markets, governments, and society...
a very risky undertaking. Conventional internal financing of innovation is generally not possible because biotech firms tend to be small with meager profits and few cash
Cash
In common language cash refers to money in the physical form of currency, such as banknotes and coins.In bookkeeping and finance, cash refers to current assets comprising currency or currency equivalents that can be accessed immediately or near-immediately...
resources. SWORD financing is used to encourage innovation by diversifying risk
Risk
Risk is the potential that a chosen action or activity will lead to a loss . The notion implies that a choice having an influence on the outcome exists . Potential losses themselves may also be called "risks"...
across wide financial markets. SWORD provides investors an opportunity to identify and finance underfunded, yet attractive projects. An SPE acts as an intermediary between the parent company and the investors, separating the project from the existing liabilities of the parent company. To provide flexibility and liquidity for all the parties, an SPE issues special securities (units) and raises finance via public or private offerings. In essence, one unit is a portfolio
Portfolio (finance)
Portfolio is a financial term denoting a collection of investments held by an investment company, hedge fund, financial institution or individual.-Definition:The term portfolio refers to any collection of financial assets such as stocks, bonds and cash...
consisting of one share of SPE’s equity, one warrant
Warrant (finance)
In finance, a warrant is a security that entitles the holder to buy the underlying stock of the issuing company at a fixed exercise price until the expiry date....
to purchase a share of the parent firms' common stock, and a call option
Call option
A call option, often simply labeled a "call", is a financial contract between two parties, the buyer and the seller of this type of option. The buyer of the call option has the right, but not the obligation to buy an agreed quantity of a particular commodity or financial instrument from the seller...
for the parent firm to buy back shares of SPE.