Key Highlights

• What They Are: Pre-funded warrants let investors pay for shares upfront and exercise later at a nominal price, near zero.

• Why Biotechs Use Them: They help investors participate while managing ownership limits, a common feature in biotech raises.

• Real-World Examples: Recent deals from Neurogene (NASDAQ: NGNE) and Cadrenal Therapeutics (NASDAQ: CVKD) used this structure.

If you follow biotech financings, you have likely seen the term pre-funded warrant. These instruments appear in offering after offering, yet many investors are unsure how they work. Here is a plain-language explainer.

A pre-funded warrant is a right to buy shares where the investor pays almost the entire purchase price upfront and only a tiny amount, often a fraction of a cent, remains to be paid when the warrant is exercised. In effect, the investor has already funded the purchase, hence the name. Exercise is usually immediate or nearly so.

Why not just buy the shares directly? The main reason is ownership limits. Some investors face regulatory or contractual caps on how much of a company they can own, often set at a percentage such as 4.99% or 9.99%. Pre-funded warrants let them commit capital now while deferring the moment they technically hold the shares, helping them stay within those limits.

For the issuing company, the benefit is straightforward: it receives the cash upfront, just as it would from a straight share sale. The structure broadens the pool of investors who can participate, which can help a deal get done.

Recent biotech offerings illustrate the point. Neurogene (NASDAQ: NGNE) included pre-funded warrants for up to 666,666 shares at $29.999999 each, with a $0.000001 exercise price, alongside its common stock offering. Cadrenal Therapeutics (NASDAQ: CVKD) also offered pre-funded warrants as part of its private placement, giving certain investors an alternative to common shares.

For investors, the key takeaway is that pre-funded warrants are close economic equivalents to common shares once the small exercise price is paid. They rarely signal anything unusual about a company's prospects and are simply a tool for structuring participation. This article is for informational purposes only and is not investment advice.