Imagine that you are a CEO or CFO of a penny stock company. Revenues are not what you want them to be; short on cash, you look around for ways to raise a bit of dough to get you through the next payroll, to purchase equipment, or launch a marketing campaign. Your average volume may be about 300,000 shares and the price per share hovers between 50 cents to less than a penny a share (micropenny). Maybe you just issued a press release.
One day, probably not long after PR Newswire distributes your latest release, you get a call from an energetic guy who has a bright idea to help you raise your much dreamt about cash. He or she may even sound like a charitable group for wayward Pink Sheet companies. You listen intently.
Since you don’t have the cash to push your own stock promotion, you gotta give something up in value. What you may not realize is all that aged debt on the corporate books is like gold to the promoter. Debt aged 6 months if reporting, 12 months if non-reporting can be easily converted into tradeable shares. And this guy says he can get you a big piece of it. He’ll graciously take the debt off of your hands with debt purchase agreements for the original noteholder. Simultaneously, with help of an exemption known as Rule 144 under the Securities act of 1933, he’ll turn around and convert the debt into tradeable common shares. He’ll “put a list on it” and promote your stock to ready buyers. Names like BestDamnPennyStocks, AllPennyStocks.com, PennyStockRumble, et cetera will spin out of his mouth like an auctioneer. He’ll talk about the value of liquidity (i.e., share volume). He’ll tell you how easy it’ll be to get your company cash. He may even offer to toss you a few bucks for your own pocket.
As one broker said to me, “It’s like printing your own money.” But there’s a cost. What you don’t know is that depending on the way the deal is constructed, the whole promotion may run against SEC regulations (think fines, black listing, even jail time). And while creating tradeable common share IS allowed by law, too many shares deludes value.
Here’s another thing you should think about: odds are (and I mean worse than 50-50 odds), you’ll never see a cent come into your company and your original note holders may never see a nickel. Add insult to injury, you just released millions of shares to a crook who made out like a bandit.