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Pastimes : Investment Chat Board Lawsuits -- Ignore unavailable to you. Want to Upgrade?

To: tyc:> who wrote (7427)	2/22/2005 3:29:25 PM
From: Jeffrey S. Mitchell	Read Replies (5) \| Respond to of 12465

...development companies often pay their bills by raising new capital. Shorting can so reduce the price that new shares must be sold from the treasury at low prices. Tyke, you are missing the core cause of the problem: risk. For example, say you have $500K to lend and someone comes begging to you about how wonderful their company is and how, if only given the chance, their company will make the world a much better place. Unless you are brand new to the business, you've likely heard this sob story a thousand times. While I'm sure you are a compassionate person, unless you consider yourself a charity, your main concern will be that if you lend them money you will get paid back-- with interest. So how do you guarantee you will get paid back? As the company is, by definition, in a development stage, are you going to wait until their product or service matures and starts to bring in revenue? Of course not. You want assurances up front. You want cheap stock up front. You want to know their marketing campaign and be assured there will be enough liquidity in the stock so you can sell your shares and get paid back. The problem is that the company doesn't want you to dump right away because that will kill any momentum they'll have from telling everyone about their newfound capital. So you take stock with a 90-day restriction. But what if, despite assurances by the company they have good news to put out, the price drops between now and 90 days hence? So, to be safe, you base the price of your stock on some percentage less than what the price happens to be a few days before the restrictions are due to come off. This way, whatever the price is, your stock will be bought at less money. So, for now, instead of stock, you get convertible debentures. Now comes the interesting part. Obviously the lower the stock price during those key days prior to the conversion, the more stock you can get for your debentures. And how do you make sure the price is as low as possible without tipping off shareholders something is amiss? You continuously short the stock a little at a time, day by day. Technically, you are naked shorting because you are borrowing against shares that are not in the float (yet). When you do convert, not only will you have made a fortune on your short, but also have loads of shares on the cheap that you can sell as soon as the stock rebounds, which it should do once you've stopped shorting it. Sound like a plan? Got any better ideas? ;^) - Jeff