SoFi (NASDAQ:SOFI) stock closed in the green on Tuesday after its shareholders approved giving the board power to enact a reverse stock split. Unlike a stock split, a reverse stock split reduces the number of shares outstanding. For example, if SOFI stock was trading at $10 per share before a 1-for-2 reverse stock split, an investor would receive 1 share priced at $20 for every two shares held. Investors approved the reverse stock split at the company’s annual shareholder meeting.
To be clear, shareholders voted to give the board discretionary authority to enact a reverse stock split. As of now, SoFi has not yet commented on when or if it will follow through with the reverse split. In addition, the vote was preliminary and did not include votes made during the meeting. Still, the proposal signals that the board is considering a reverse split.
At the shareholder meeting, CEO Anthony Noto added:
This is very much about giving the board an option to be prepared for some scenario that we can’t predict today. We are incredibly proud of what we’ve built, but markets can be irrational. We think we have a durable business, so our confidence is in no way reflected in the ask for this vote for our board.
So, why would the fintech company need a reverse stock split in the first place? Let’s get into the details.
SOFI Stock: SoFi Shareholders Approve Reverse Stock Split
SoFi provided three main reasons as why a reverse stock split would be beneficial to the company. First, the reverse split will allow SOFI stock to appeal and be more accessible to investors. An increase in the stock price could make SOFI more attractive to brokerage firms that are hesitant to recommend low-priced stocks to their clients. Some institutional investors also have policies in place that prohibit them from purchasing low-priced stocks. On top of that, an increase in price could attract more analyst coverage.
Second, the reverse split could improve the perception of SoFi as an investment security. SoFi states that lower-priced stocks are perceived by some people as “risky and speculative.” This could affect the price of SOFI, as well as its liquidity. The company adds that as a financial services company, it is especially prone to this perception.
Finally, SoFi believes a reverse stock split could attract further talent and partnerships. A company’s share price acts as a “signal” to potential recruits and business partners. SoFi believes that it is currently financially healthy, and a reverse stock split would better reflect this via share price.
Ultimately, it is up to the board to decide whether a reverse stock split is appropriate. SoFi emphasized that the board reserves the right to not enact a reverse stock split if it is not in the best interest of the company and its shareholders.
On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.