Gator, floorless are completely legal and investors were informed (I just copied the last 10K where all the information was present). Investors keep rationalizing why their stock will not suffer the consequences of floorless instruments (I have been "wasting" my time over the last few days explaining again and again the dangers, but most do not believe me, at least I have not been dubbed a short or a "shareshaker"). Look at NUKO they just declared bankruptcy.
You must understand that the conditions lenders or investors impose on a company indicate the company's financial strength. If the company is asked to pay a very high price for such financing, it usually means that the company has exhausted "traditional" means.
Here we have a company that says it will need a billion bucks over the next three to four years. They have a lot of hope and great "promises", but all they can show as PROVEN RESERVES, and that is the only thing bankers will look at, is $90 MM. Of course the bankers are going to demand a safe fool proof way to recover their investment. The floorless is such a safe way, on the back of the current share holders.
Look at the last instrument we talked about, the $31.5 MM from institutional investors (including RGC after its victorious burying of NUKO). They get 6.4% of the production from the three wells, for ever. They get their money back either in cash or in stock. If they decide when to convert they get paid 15% per annum (accruing monthly, meaning probably a real rate of 16.5% or so) on their money. If HEC decides when the conversion takes place, they get 25% (really closer to 27.5%) interest rate. That is what I call "usurous" rates. There is competition out there, and if that is the best thing they can get (after raising in Europe $70 MM at a fixed conversion rate and only some 6% interest rate), it tells you that no one else wanted to touch this with a 10 foot pole. The form of this instrument should be a major warning signal.
As I have said before, if a company is forced to resort to a floorless, it is because their access to the normal capital market is closed. You should draw the consequences.
I am in the process of raising capital for a venture I am starting myself, and have been approached by such a shark organization . Do a reverse merger into a shell, they said, we have few shells like that available, then we will issue you a convertible debentures, we got the investors ready with a bunch of money available. After I ask about the expected conversion rate, they are not bashful, it is great they said, the conversion rate changes up with the price of the stock. Up? I say, how about down? Down also (keeping a straight face), they say, but don't worry, after all your plan is to be positive cash flow in a year, they'll never convert at increasingly lower prices because the stock will roar, of course. They would not tell me that those floorless will start shorting the stock after they sucker in a bunch of individuals believing in the future of the company, probably hyping it over the internet as "the future is here", and then once the price is nice and high and dandy, and the net is buzzing with "$100/share in a year guys, guaranteed", they start the process of continuous shorting and spiraling down the price of the stock. If after a year, we indeed are positive cash flow, they end up owning 90% of the company, and having recovered between 3 to 10 times their investment, if we die on the vine, they have recovered their "investment" 10 times over. Of course, I have chosen not going this route and instead am going through the tougher process of raising the money from "accredited investors"
Zeev |
