IMO, what we are looking for are deals with little, or no risk, and a potential high return for the investors. (The ideal investment vehicle!) This is created by having the following terms in the debenture agreement:
1) variable conversion rate (most important)
2) brief time frame until first conversion date. (ZITL has 90 days)
3) shortable stock.
4) upside cap on conversion rate.
5) I think the Offshore nature is important (discuss later).
6) it is also helpful (not critical) if the investors can convert below the fair market value.
HOW IT WORKS, IMO:
1) The investors short the stock in sufficient quantity to cover the entire debenture. There is no risk in shorting, because of the upside CAP on conversion rate. (note: these investors will have access to shares from insiders). So the investors have all of their cash back immediately!
2) Now the Company receives a large cash infusion that guarantees their survival for a year or two (long enough that these investors will be gone). This is why there needs to be a short time frame to the initial conversion date. The investors want to sell their shares, before management blows all the new cash.
3) At the conversion date, the investors convert some shares and either cover part of their short (no short rally - just hand over shares) or sell shares and drive down the price. The more they sell, the lower the price. The lower the price, the more shares they receive. The lower the stock price, the more money the investors make. (For ZITL's return to investors, see exchange2000.com )
4) the offshore aspect is important because I think these types of deals will be ruled illegal (definitely unfair to existing shareholders), if not already illegal. Since the money will have moved offshore, the investors can protect their gains. If someone can find a deal, with these terms that is not offshore, this may blow this part of my argument.
May I suggest that when posting stocks, that we compare them against the check list at the top. As an example: ZITL debenture, variable conversion, converts in 90 days, shortable stock, upside cap, offshore (Cayman and Bermuda), below fair market value.
Other deals may be bad, but I would like to focus on this type, for obvious reasons - $$$. Best to everyone, Bill |
