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Understanding the baby shelf rule

October 03, 2025

Good afternoon,

Most small-cap stocks depend on dilution to stock pile cash.

This is because they are not profitable.

Stocks have an IPO which raises a lot of money.

But when they run out of that cash, they raise more.

The process of raising capital after the initial IPO is called a ‘secondary’ offering.

And it’s done through what’s called a shelf.

Think of it this way, a company has a lot of shares, ready to sell, on a shelf.

If they pull them off the shelf and price them, those shares dilute the share structure and the stock often falls to the price of the secondary offering.

How can we use this information to make informed decisions when trading small-cap stocks?

  1. We might want to avoid holding overnight if we think a company will dilute through a secondary offering

  2. We might want to get short (bet against) the price if we think it could drop due to dilution i.e. secondary offering

Let’s use a real world example from this week:

DFLI is up a lot based on a $300,000 award they are likely to get.

DFLI is low on cash. The company has 2.8 months of cash left based on quarterly cash burn of -$3.93M and estimated current cash of $3.7M.

DFLI has a shelf in place.

What’s interesting on this trade is they have what’s called a ‘baby shelf restriction’ that looks like it’ll be unrestricted after the close today.

We know a shelf is a bunch of shares, on a ‘shelf’ waiting to be taken off and sold into the market.

But what’s a ‘baby shelf’ you ask?

DFLI has the ability to raise $150M. Since they already raised $5.5M let’s call it $145M on the shelf.

The problem for DFLI is there’s a baby shelf restriction.

As you can see above they need to close the stock above $1.29 to ‘UNLOCK’ the full dilutive capacity.

This isn’t to say they will, but since it looks like the price will close above $1.29, there’s added risk the company will dilute — make sense?

Price to exceed baby shelf = $1.29.

Definition: The price that the stock needs to close above to be no longer restricted by baby shelf, which may allow the company to raise more funds through the shelf.

As a teachable moment I’ll take DFLI short into the after hours to see if the company acts on this.

Sometimes companies try to announce bad news on a Friday night (dilution is bad) hoping traders aren’t around to see or act on it.

With the stock price up from $.30’s to $2’s in a few weeks and the baby shelf of $150M unlocked (assuming a $1.29+ close) then risk goes up for longs.

To short is to bet against price, which of course is risky, but in this sense it makes cents I believe.

I encourages you to learn from this and watch across the coming days to see what happens to the price of DFLI stock.

I like this company, I’ve traded it long. And I like seeing companies go up in price.

However, I’m also about teaching trading and when it makes sense to share something with you that you can use going forward, I’ll do that.

Have a great weekend, I’ll be in touch. And again, watch the following:

  1. Does the price close above $1.29

  2. Does the company raise money and if so, at what price (usually lower)

  3. What happens to the stock from here

Talk soon — Jason Bond

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