Vancouver, British Columbia – September 19, 2014 — Public company financings, when done well, are supposed to make a company healthy and thrive but a new report focuses on the fact an increasing number of small cap companies are being hobbled by toxic financing agreements.
Several high profile lawsuits involving financeer/investment firm Ironridge Global point to the fact that toxic financing is not just a colorful phrase to describe a bad situation; it describes specific financing deals which restricted to companies that are fiscally weak. An investor purchases convertible equities or debt that allows the investor to exchange those instruments for common stock in a weak company. In most scenarios, the instrument converts to a fixed number of shares. In the toxic financing scenario, t?he weak business is so desperate for capital it allows the investor to convert the instrument for a number of shares based on a specific dollar value.
This allows the investor to put the company in a death spiral by letting the investor converts some of its equities for common stock then sell it. This usually causes the market value of the shares to plummet, which allows the investor to receive even more shares as it converts additional equities. Eventually, the share price crashes, and all the original investors bear the expense. The perceived “malicious investor” gets all the profits.
To say there is growing hostility against these “toxic” investment firms is an understatement. One message board on the popular investment site InvestorsHub, spews contempt through its use of dry humor, features links to the firm’s growing number of lawsuits and even points to the extravagant wedding of one of the firm’s principals.
The lesson for small cap investors is to learn to read the terms of the financings your companies agree to. Altogether, toxic financing companies appear to worsen small investors’ already risky situation. The complete special reporton toxic financings by E. Micheal Greenberg is available now at Small Cap Network:http://www.smallcapnetwork.com/Toxic-Financings-A-Case-Study-For-Small-Cap-Retail-Investors/s/via/21121/article/view/p/mid/1/id/8/
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