I've looked over the equity financing line for Viragen (VRGN), details of which can be found in: sec.gov
(Exhibit 10 - the regulation D subscription agreement for which Swartz serves as placement agent)
In my opinion:
1. It's a great deal for the subscribers to this Regulation D offering provided they are able to borrow shares of this low priced NASDAQ issue. (More on this below).
2. It's an OK deal for the company if the alternative is running out of money for operations.
3. It's a bad deal for current shareholders.
Why is a good deal for subscribers provided they can do a borrow of the company's shares? Essentially the deal is that they get to buy the companies shares at a 12.5% discount from the lowest closing bid price over a two to twenty trading day period (the discount must also exceed $0.225). Note that the shares to be received are normally free trading, not restricted shares. This permits the subscriber to engage in the following arbitrage (hedging) maneuver: Do a short sale of the number of shares to be received under the put at any appropriate time during the pricing period (the subscriber agreement specifically permits short sales for purposes of hedging the puts, though prohibiting other short sales). Unless you are either not terribly clever or are very unlucky, the price received via the short sale will exceed the lowest closing bid price during the pricing period. Upon delivery of the put shares, use them to cover the short sale. As a result the subscriber makes a virtually riskless 14.3%+ (0.125+ divided by 0.875) arbitrage profit over a very short period of time.
BTW, as an added bonus every six months the subscriber gets a warrant to purchase 10% of the number of shares put in the previous six months at an exercise price equal to 108% of the lowest closing bid price during the 10 trading days proceeding the six month anniversary.
The reason why it's an OK deal for the company if the alternative is ceasing operations is self explanatory.
The losers in all of this are likely to be the prior holders of the company's shares. At a minimum, they lose due to the dilution effects of the added shares. Given that price of the shares is largely immaterial to the subscriber during the arbitrage maneuvers (of course, he/she does need to follow the uptick rule), there is likely to be downwards price pressure at the time. In addition, as the nature of these deals becomes better known, use of such a deal (just as with floorless debenture financing) is likely to be regarded as a symptom of a company in trouble (more downwards price pressure).
Note that both VRGN and TCLN are NASDAQ companies. One of the conditions of the VRGN agreement is that they remain a NASDAQ National Market System company (this is undoubtedly also true for TCLN as well, but I haven't looked at their corresponding agreement). As we all know, IBUY is not on the NASDAQ and accordingly is tougher to borrow. Apart from any other considerations, on that basis alone, I would expect the terms of the IBUY agreement to be worse for IBUY and existing shareholders than for the VRGN and TCLN shareholders.
I should also note that both TCLN and VRGN are low priced issues (and have been at all relevant times). Thus they are tougher to borrow - indeed most retail brokers won't permit short sales of shares priced under $5. However, AFAIK that is not a requirement of the securities laws and rules, it is simply a requirement put in place by the given brokerage because of the risks involved to both the customer and the broker in shorting these typically highly volatile issues. Under the circumstances the risk in a borrow is minimal and I would expect the subscriber would be able to borrow the shares,
All of the above other than the facts are just my opinion. |
