In response to another question I received from a fellow investor:
TUTs buying into SCRC can be a two-edged sword, especially if you happen to be a shareholder at the time the capital raise occurs.
There is a reason why investors looking into buying into a stock want to know how much TUT ownership there is. Notice they want to see a high TUT ownership % BEFORE they themselves buy in? Most typically don’t want to take the risk of being around WHEN the capital raise occurs in the event that the capital raise is at a discount that may result in a decline in the sp once the market hears about it.
Everything depends on the terms and the pricing of the capital raise. Many are fairly priced. Some TUTs truly believe in a company and are willing to pay fair market value, but just don’t want to drive the price up artificially by trying to buy a substantial position on the open market. So, for example, they will enter into a private placement deal w/the company directly to purchase their massive tranches at the current prices. So, when this happens, it is good for existing shareholders because no one is cutting in front of them in line with discounted shares. The bad thing is that by going the private placement route, this results in new shares being issued, which means dilution. BUT, if the deal is fairly priced, I have typically seen that the market will take this type of deal in stride and absorb the dilution with minimal volatility as the absence of a discount is viewed as bullish.
The worst case scenario is a private placement at a discount. Here, we have not only dilution due to new shares being issued but also tons of shares cutting in front of you in line because they have a lower cost basis than what current shareholders have. This is precisely what happened with the 22M shares of .05 PIPE stock that we are all suffering through, which has suppressed the sp for pretty much the entire 2014 year.
Another scenario is if a TUT decides that they prefer to buy shares on the open market. If this happens, the good thing is there is no dilution as they are simply buying existing shares. The bad thing is that there is typically a reason why a TUT would rather pay open market prices than buy at a discount thru a PIPE deal: The TUT has no intention of being a long-term investor but is essentially no different than a retail trader and intends to flip. That is the primary reason why TUTs would forsake buying shares at a discount: To not be trapped in a 180-day lockup period that would come with buying discounted restricted stock.
So these TUTs would also have the resources necessary to short the stock in order to hedge their long positions (understandably so), so the probability of increased shorting activity increases as more of these TUTs climb aboard the SCRC train. Shorting is largely non-existent currently due to retail’s general inability to procure the maintenance account levels necessary to short penny stocks (i.e. it is too cost-prohibitive). These trading-centric TUTs will simply add to the volatility, which can be good and bad for existing shareholders depending on whether you trade around a core position or not.
AI
