rossi...
basically companies use this as an alternative means of doing a second IPO. Mostly are smaller companies with little capital and could not do a secondary offering even if they wanted to because the ipo firms are not willing to take the risk on thes illiquid companies. Companies basically on hard time and needing money and gullable CEO's willing to make these deals, believing it is in the best interest of shareholders.
Most of the deals are PIPE's(private investments in public equity))... Toxic financing...these deals have variable conversion prices opposed to fixed prices of the stock. This protect the investors from market volitlity... Some of the investors short the stock sending it down even further before conversion takes place...the conversion price get adjusted downward as the stock falls, basically haveing no floor vs having a hard floor and usually conver at a dicounted price 45-50% of the market by adjusting a price over the past 20 intra-trading days but not including the closing conversion date to get the lowerst price possible and also subject to a maximum price...Without fixed pricing, the financiers and their buddies make their money by pounding the shares through shorting—usually of the naked variety-- and, once the price has been decimated (the dreaded death spiral) convert their debenture, preferred, whatever, into ridiculously cheap shares to cover their massive short sales. Usually, the lower the price, the more shares they get courtesy of a favorable value/conversion rate.
The company ends up having to issue massive numbers of shares to satisfy the conversions and it becomes a vicious circle as the selling begets conversion begets more dilution. Once the share price has been destroyed and the vehicle converted into all the shares necessary to cover
Hope that helps...no time to spell check and GLTY
AI
