Penny, Convertible Debentures are not all bad as long as the company can get some protection terms like:
1. Anti-dilution terms
2. Anti-shorting terms
3. Redemption clause
Most of the OTC sharks do not allow these clauses because they would be unadvantegous if they pulled the shorting / hedging (pre-selling stock) game. (Dilutive Distribution)
For example, I would like to read an OTC announcement that states the following 7 points, which I do not see in the OTC financing or a company desperate for cash:
1. - **** is pleased to announce $**** Flexible Equity Line Financing This flexible equity line financing permits the Company, at its option, to require the financier to purchase up to an aggregate of $*** million of Common Stock or Preferredat a 2% discount to the lowest sale price of the Common Stock during any of the 3 trading days preceding the date of purchase. Not 30 but 3 days.
2. - The financier, further, is not required to purchase shares in any quarter in an amount in excess of a certain minimum trading volume achieved in a particular quarter of the purchase or preceding thereto.
3. - The Company, also, can set a minimum purchase price for any quarter, and can also prohibit the purchase of stock by the financier during a particular quarter, which would reduce the total amount of the Investor's obligation by such amount, at any time.
4. - The Company is providing the financier with up to ****** of *-year warrants to purchase Common Stock at a 180% premium, *****, of which were issued upon execution of the Agreement and the balance, of which will be based upon the market price set each year by the company.
5. - The financing Agreement also contains customary anti-dilution, certain anti-shorting provisions and non-penalty redemption provisions.
6. - This financing did not involve a broker fee to the Company.
7. - **** now has financing that will significantly strengthen our balance sheet by allowing us to draw down the amounts we need over the next ** months with a structure that we believe provides for an orderly market distribution. The funds, if and when received, will be used for (whatever) ...
This type of news release would mean the terms are not locked in concrete and thus a redemption clause for the company has been placed in the terms somewhere so the company has certain options and can buy its way out of the financing should it prove damaging to the company and shareholders. This would be something like:
Redemption: Prior to the expiration of the Conversion Term, the shares of this Series (whatever they maybe) shall be redeemable at the option of the Company, as per the agreement between the Company and the financier. After expiration of the Conversion Term, the Company may redeem any shares of this Series at a price equal to the Stated Value.
Now if I have worded this right, this redemption clause would basically nail the financier should they decide to short / hedge for additional shares. To me the purpose would be that if the financier does short against the escrow account and then sends the certificate in for conversion, the company can just buy the certificate so the Company merely redeems the Shares at an aggregate purchase price. Immediately the company makes a news release staing this redemption to its shareholders and thus the financier now gets to take the money and go cover the short position. Another words, the financier does not have a risk-free short vessel clause. That places risk on the financier when deciding to short the security thus giving some protection for the company and the shareholders.
Some other key words or phases I would look for in the terms are: "the Company may suspend the right of all Holders to convert such shares..." Another words suspend the conversion rights if they suspect foul play such as: engaging in any short selling or other hedging transaction including, without limitation, option writing equity swaps or other types of derivative transactions, the intent of which is to transfer incidence of ownership into market. This is typical in big financing deals of say NYSE and NASDAQ but rare in OTCs. However, these bigger market can pretty much track the trading and what is happening in the trading where an OTC is unregulated, which makes the OTC at a disadvantage and thus the loan sharks with their pretty words have taken many a company.
Heck all of this I am saying is rare in OTCs because the loan sharks are after two things:
1. As much stock as they can get for the dollar should they actually believe in the company
or
2. A no-risk shorting vessel for gain since the OTC is a nonregulated market and they can get away with murder.
A few other things I look for is finacier or investors intent and the max amount of shares or surrender of the company.
LOL ... Now do not confuse this with voter intent but basically does the financing terms clearly show the finacier, purchaser, investor, etc. is purchasing the Securities for investment purposes and not with a view towards shorting / hedging for the purpose of dilutive distribution.
Whereas, I would be looking for a maximum amount of ownership for the financing as well say a clause that limits the dilution to the finacing to a maximum of say **% of the current outstanding because if it is just to the outstanding then when the conversion is complete the outstanding has risen and thus more stock is available for converting. Amazing how a simple missed word can change the entire financing.
Now I am not a professional analyst, or financial advisor or anything except some moron that has read so many filings over the last 3 years no wait 4 years on the 28th of the month so I am going off my exposure and experience in the market.
The bottomline is if the financing terms are one sided and advantageous for the finacier, the shareholders are screwed and so is the company because it just became a stock printing machine.
Hey, I could be wrong but this is how I see it. No other way to convey it. I suspect I will be attacked for my opinions on Convertible debentures because as what I believe spreads it kills the loan sharks that attempt to capitalize on OTCs for their own gain and there investment intent is nowhere close to the objective investment.
Gary Swancey
