I am not the best writer so im going to post this from Biosectinvestor. This pretty much sums up how I look at a R/S as well...
Think about a billion share company trading at .10. They want to get to $1.00, so that they can attract new investors. They've really been struggling for years, but they have a good business plan, that should generate billions of dollars in potential JV/Licensing and operating revenues. But they want to get there quickly.
So, they do a 10 to 1 r/s. OK. Now there are 100 million shares. Let's say you were a 10% holder of shares. Where before you owned 100 million, you now own 10 million in a 100 million share company. The market cap, by the way, has not changed by this transaction. It seems superficial. You seem to be in the same position. Now the company issues a new 100 million shares. That's not so many, right? They had a billion, now they have 200 million. They needed the cash they said, so they got a JV partner to take those shares.
Now you own 5% of the company. If the capitalization had been as before, they'd have had to offer 1 billion more shares to push you down to 5%. A few months later, they issue another 200 million shares. They have 400 million shares outstanding now, but you are now down to 2.5% of the company, and in comparison to your old shares, this is the equivalent of 4 billion shares. But the thing is, you're just seeing 100 million numbers, so you're not really getting how much more quickly, per new share sold, that your ownership percentage is being diluted. You see, every new share is equal to 10 old shares, in terms of your percentage ownership. Whereas before, when they sold the shares, and the price could rise organically, based upon the skills of management to bring its plans to fruition, every new share was equal to the shares that you originally bought 1 for 1. So new buyers of shares, are massively advantaged over you. The price of the shares could still, by the way, under the new scenario, go down to penny stock levels. And that would make the dilution of your interests even worse.
Dilution in an early stage company is not fun. Dilution on steroids, after a massive r/s, is very, very painful.
Giving a JV partner, new shares after a r/s, not fun either. The J/V partner should get our same shares and be subject to the same r/s, but you know that wouldn't happen. They would never accept that, even though it's just a calculation, right? No, there is a reason that r/s is perceived very negatively. New capital would want old capital to be crunched, and to be advantaged with, effectively, super equity
As for conservative investors, they don't invest in start-ups. It has nothing to do with pennies. They are concerned with preservation of their riches, not getting rich. Many wonderful biotechs are penny stocks, no matter how many shares they have outstanding, and the underlying value in a company, has nothing to do with whether it's share price is under $5.00 or not, that's an arbitrary number. Analysis has to go much deeper than such superficiality. However, there are clearly risks in any under-capitalized penny stock, there is no question.
I think the answer though, is that this company is not going to be a stock for "conservative" investors. By that, people usually mean grandmothers, widows and orphans, who need a set amount of income per year to live and who take no risks. They are looking for low volatility. Growth companies are high volatility by definition. Those folks should be in utilities, treasury bonds, CD's, etc. Something with a steady dividend or interest payment, so that income makes up for some very minor volatility, and they don't have to eat their capital, to live. And then conservative investors stay diversified, to avoid any fluctuation in capital - as they really just want income mostly on their substantial capital, previously earned. This company won't meet their criteria until it is extremely established already, in the field of medicine, and pays a steady dividend. The investor target audience, in that context, cannot possibly be conservative investors, as I see it. That would make no sense for companies like this, at this early stage.
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