Me also. Whatever happens, probably will not be good for present shareholders, in my opinion.
Section 3(a)(10) can be used for any debt or claim, not just another security. Accordingly, Section 3(a)(10) can be used to settle trade payables such as office supply invoices, transfer agent fees, EDGAR fees and all forms of expenses incurred in the company’s operations. Since many vendors are not interested in selling stock in return for payment, and since many of these invoices would be too small to warrant a court proceeding, a group of corporate finance professionals have made a business of buying and aggregating available debt and completing 3(a)(10) transactions with companies. The process is straightforward. A company assists the potential 3(a)(10) creditor in identifying and purchasing all or a part of the company’s outstanding debt following which a lawsuit is filed and a hearing completed meeting the requirements of Staff Bulletin 3. The same company can complete the same process multiple times as it continues to operate and incur operating expenses.
Moreover, as long as the requirements of Staff Bulletin 3 are met, the company and the creditor can fashion the 3(a)(10) transaction any way they see fit. The trend has been to fashion an agreement that looks substantially like a convertible promissory note with takedowns of the debt by the creditor priced at a discount to market and subject to an ownership limitation to avoid affiliation.
This structure has a tendency to drive down the company’s stock price and result in substantial dilution to existing stockholders. [color=red]For example, if the security is priced at $1.00 and the 3(a)(10) creditor converts $10,000 of debt and immediately sells those securities into the public market, that very selling pressure may drive down the price. When the 3(a)(10) creditor converted the next $10,000 in debt at a lower price, say $.80, they would get more common stock to cover the same amount of debt. Upon selling this stock, again, the selling pressure would drive down the price. as the 3(a)(10) creditor continues to convert into more and more stock to cover the same amount of debt, and sell such stock, the price is driven down further and further. [/color]Moreover, as the shares are freely tradable, the amount of stock in the public float continues to increase, resulting in dilution to the current shareholders and making it much more difficult for the same stock to see an upward movement in its price.
My posts are not meant as investment advice. Always check company filings and do you own Due Diligence
