Tuesday, October 23, 2007 7:25:20 PM
Assume that a pick sheet company, xyz, is at its maximum authorized shares of 500MM and is now without any operating capital. Let’s assume you own 1MM of those shares. Assume that the current stock price is $0.01. Your portfolio for the stock lists your xyz asset at $10k. The company capitalization is $5MM.
xyz needs to raise capital so they decide to do raise money and do a reverse split. They decide to do a reverse split of 500/1. If that's all they did, the company would have 1MM shares worth $5/share and you would still have $10K in your account. But they sell 200M post split shares to a funding source for $1/share and give the CEO and other principals of the company another additional 500M post split shares to make up for what they expect to lose by the reverse split. The company now has a capitalization of $5.2MM and 1.7MM shares outstanding, but the per share capitalization is now $3.06/share.
The funding source is smart and insisted on unrestricted shares. He sells his shares quickly. Others that know how this works, shorts xyz since it's over $2/share. But not for long is it over $2. The company needs to raise money and sell shares for what ever they can get, on and on.
Like I said, you are theoretically right. But who wants to be theoretically right and poor wrong?
Regards,
Richard
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