Not quite true. Convertible note holders can convert their debt into shares at any time after the convertible date in their agreement. The restrictions are instead on what kind of shares they receive (restricted or free-trading) and how they can be sold. There are multitudes of regulations which apply, but there are also a lot of exemptions. And, there are also many very sketchy lawyers and transfer agents (in conjunction with the dishonest management of the debt issuers) who are both willing to look the other way in order to get paid.
Whenever you are talking about toxic death spiral convertible debt, remember these 3 things:
1. Toxic death spirals KILL every company that issues them. That is why they are called "toxic" and "death". It is not a matter of if, but when. No investor should ever put in a penny into shares of a toxic death spiral issuer. EVER.
2. if a company has issued toxic death spiral convertibles, always assume they are being converted and sold into the market. The toxic convertible holder is always guaranteed to make money on the conversion and sale, regardless of price. The only limitation to their sales is volume - they always need to find people willing to hand over their hard earned cash and buy the deeply discounted stock from them at market price.
3. If you ever think you found a company that is different from all the rest and the story is just too good to pass up, see Rule #1. Once a company starts issuing toxic convertibles, it is finished. They enter the death spiral almost immediately, and their time is limited. No company ever survived by handing out unlimited numbers of common shares at a 40-60% discount to the market price.
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