Section 382 and Capital Raising
Raising capital can increase the risk of the Section 382 Limitation

Reduce Your Section 382 Risk of Raising Capital

This article offers 3 ways on how to reduce your Section 382 risk of raising capital. This topic is top of mind for many CFOs and Tax Directors right now.  Due to the disruption caused by COVID-19, many companies are incurring big losses and earning less revenue.  They are strapped for cash and need to raise capital.  However, raising capital can trigger a tax rule under Section 382 of the tax code. 

Capital raising transactions are “testing dates” that can cause a company to have an “ownership change” under Section 382.

When a company has a change of ownership, Section 382 limits the amount of tax losses a company can use to offset taxable income.  So even if a company cannot use its tax losses now because it has little to no income, tax losses can be of value in the future.

How does a company that is raising capital reduce the risk of triggering Section 382? 

There are three ways to mitigate risk:

  • First, make sure your Section 382 Study is up to date.  If not, you are in the dark about the risk of triggering Section 382 and losing tax assets. You won’t know whether and when Section 382 was triggered.
  • Next, model the impact of the capital raise transactions.  Modeling gives the CFO and Tax Director real-time visibility into the risk of triggering Section 382. As they work through the deal mechanics with the bankers, informed decisions on the following types of questions are key:
    • How much equity to raise and at what price?
    • How much of a discount between market price and issue price?
    • If warrants are issued, what’s an acceptable warrant coverage?
    • How much of a “Section 382” cushion does the company have? What’s the company’s risk of triggering Section 382?
  • Finally, consider an NOL Poison Pill and/or an NOL Charter Amendment.  The details are beyond the scope of this article, but these are commonly used mechanisms that many public companies use to preserve their tax attributes.  As of May 16, 13 public companies have adopted NOL Poison Pills in 2020. 


Unfortunately, COVID-19 is creating liquidity challenges for many companies. As you consider capital raising, be mindful of how such transactions will impact your tax assets for purposes of Section 382.