Diluting stock -- Q&A
November 20th, 2015 at 2:05:45 PM
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Quote: wellwellwellAs of 11/3 NTEK had 1.566 billion outstanding.
As simply a general question, what are the reasons a company would issue this many shares?
"For with much wisdom comes much sorrow." -- Ecclesiastes 1:18 (NIV)
November 20th, 2015 at 2:09:59 PM
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Quote: WizardAs simply a general question, what are the reasons a company would issue this many shares?
In the Facebook movie they did something similar. It diluted the ownership of the previous majority share holders to make a new majority. I believe that is what happened anyways
Expect the worst and you will never be disappointed.
I AM NOT PART OF GWAE RADIO SHOW
November 20th, 2015 at 2:15:22 PM
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Quote: WizardAs simply a general question, what are the reasons a company would issue this many shares?
You must realize these companies aren't audited, regulated by the SEC kind of companies. They can't issue shares like SEC companies.
Over on the NTEK/NTGL thread started by Mr. V, I explained the process and how many shares NTEK has issued in the past 10 months.
To answer your question directly there doesn't appear to be a valid answer, and it appears the company itself is seeing very little of the proceeds from the share issuances.
November 20th, 2015 at 2:21:15 PM
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Quote: WizardAs simply a general question, what are the reasons a company would issue this many shares?
For a small penny stock company they will sell shares to raise cash or pay debts. Generally these companies have very little operating capital and when the bank account gets close to zero they will issue and sell X new shares at a price slightly below market value to give themselves more operating cash. Obviously each time they do this it dilutes current stockholders and there really isn't any recourse. If they don't sell more stock the company goes out of business and the shareholders get nothing.
A lot of people say that penny stock companies sell more stock than they do goods and services. With penny stocks it is easy to sell people dreams.
At my age, a "Life In Prison" sentence is not much of a deterrent.
November 20th, 2015 at 2:27:23 PM
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Quote: DRichFor a small penny stock company they will sell shares to raise cash or pay debts. Generally these companies have very little operating capital and when the bank account gets close to zero they will issue and sell X new shares at a price slightly below market value to give themselves more operating cash. Obviously each time they do this it dilutes current stockholders and there really isn't any recourse. If they don't sell more stock the company goes out of business and the shareholders get nothing.
A lot of people say that penny stock companies sell more stock than they do goods and services. With penny stocks it is easy to sell people dreams.
Not true DRich. To sell stock as you described the company has to file a registration statement outlining all the details of the stock being sold. NTEK is not a SEC reporting company and is unaudited so they could never file a registration statement.
NTEK kind of companies can only issue shares for debt aged one year or older. They can borrow from toxic convertible financiers but those shares are issued at a huge discount to the market price. Google Rule 144.
November 20th, 2015 at 2:41:53 PM
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Quote: wellwellwellNot true DRich. To sell stock as you described the company has to file a registration statement outlining all the details of the stock being sold. NTEK is not a SEC reporting company and is unaudited so they could never file a registration statement.
NTEK kind of companies can only issue shares for debt aged one year or older. They can borrow from toxic convertible financiers but those shares are issued at a huge discount to the market price. Google Rule 144.
First of all, I want to make it clear that I didn't say that NTEK did any of this.
Technically, you are probably correct. The company I used to work for would find an investor to "loan" money that was collateralized by shares of stock. In our case the loans were never repaid and the investor would end up with the stock. I couldn't even try to explain the underlying details of the transactions.
At my age, a "Life In Prison" sentence is not much of a deterrent.
November 20th, 2015 at 3:27:40 PM
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This is a split-off of GOOD GRIEF, I'M NEARLY RUINED!.
First let me say that I'm embarrassed to have to ask these questions. I studied economics in college but never learned anything practical from it.
So, let me say that I find it totally unethical to current stock holders to issue new stock out of thin air. The old stockholders should either agree to it or be fairly compensated for their smaller share of the company.
Yes, I saw "The Social Network." As I recall, the guy who got diluted did sign something agreeing to it, although he was trusting the advice of a dishonest attorney.
Is my understanding correct? If so, why would anybody buy a share in anything knowing that share could get diluted at the will of the company? Does this happen often? I've played the stock market and don't recall my share values ever dropping precariously overnight due to a dilution.
First let me say that I'm embarrassed to have to ask these questions. I studied economics in college but never learned anything practical from it.
So, let me say that I find it totally unethical to current stock holders to issue new stock out of thin air. The old stockholders should either agree to it or be fairly compensated for their smaller share of the company.
Yes, I saw "The Social Network." As I recall, the guy who got diluted did sign something agreeing to it, although he was trusting the advice of a dishonest attorney.
Is my understanding correct? If so, why would anybody buy a share in anything knowing that share could get diluted at the will of the company? Does this happen often? I've played the stock market and don't recall my share values ever dropping precariously overnight due to a dilution.
"For with much wisdom comes much sorrow." -- Ecclesiastes 1:18 (NIV)
November 20th, 2015 at 3:36:14 PM
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Quote: WizardIs my understanding correct? If so, why would anybody buy a share in anything knowing that share could get diluted at the will of the company? Does this happen often? I've played the stock market and don't recall my share values ever dropping precariously overnight due to a dilution.
When something like this happens the argument is that the shareholder is not necessarily diluted. They own a smaller percentage of the company but the company has gained an asset so therefore the company is more valuable.
This happens often when companies buy each other. Company 1 will offer X number of shares to the shareholders of Company 2 in lieu of cash. Although the shareholders of Company 1 now own a smaller piece of Company 1, Company 1 is now more valuable because it has all the assets of Company 2.
The theory is that the stock price will fluctuate to match the value of the company.
At my age, a "Life In Prison" sentence is not much of a deterrent.
November 20th, 2015 at 3:46:12 PM
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Diluting with 10's of millions of shares
is often part of a scheme called 'pump
and dump'.
https://en.wikipedia.org/wiki/Microcap_stock_fraud#Pump_and_dump
is often part of a scheme called 'pump
and dump'.
https://en.wikipedia.org/wiki/Microcap_stock_fraud#Pump_and_dump
"It's not called gambling if the math is on your side."
November 20th, 2015 at 4:30:58 PM
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Quote: DRichWhen something like this happens the argument is that the shareholder is not necessarily diluted. They own a smaller percentage of the company but the company has gained an asset so therefore the company is more valuable.
Good point. Are there laws to enforce that dilutions are doing for just cause?
Quote: EvenBobDiluting with 10's of millions of shares
is often part of a scheme called 'pump
and dump'.
I'm not saying you're wrong but I thought most pump and dumps were buying into a questionable stock and combining it with a lot of hype about how it is growing, and then those on the inside dumping their shares at a huge profit.
"For with much wisdom comes much sorrow." -- Ecclesiastes 1:18 (NIV)
November 20th, 2015 at 5:20:01 PM
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Milken and company used to deal with penny stocks. The man ended up in jail. These penny stocks seem to be crook's heaven.
November 20th, 2015 at 6:26:22 PM
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Isn't this similar to what happened in the Wolf on Walstreet. They get the number of shares up so technically the company is worth more, then stock goes up slightly and the big owner dumps their shares. Something like the Steve Madden incident
Is it bad that my references come from movies?
Is it bad that my references come from movies?
Expect the worst and you will never be disappointed.
I AM NOT PART OF GWAE RADIO SHOW
November 20th, 2015 at 6:46:44 PM
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I posted in an earlier topic about Robert Brennan and his First Jersey Securities company in the 80's. I was a young kid looking to make a quick fortune and was an easy mark. Was a victim of multiple pump and dumps and learned quickly. Luckily someone introduced me to Vanguard and their original Windsor fund and I have stayed away from micro caps ever since.
November 20th, 2015 at 7:22:58 PM
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Yeah, this sort of thing happens all the time.
They issue stock to raise money. If they are careful with how much they issue, they won't hurt their stock price much. For some companies in high demand, it is almost like a second IPO, with people clammoring to get a piece and the stock price actually rises.
They will also buy back stock in an attempt to raise the stock prices and increase "shareholder value" this can also make investors happy and also increase the price of the stock from that.
While they don't see any money from that kind of move, and really it costs them some cash flow to buy the stock back, it can help "the numbers" which affect your bond rating and how much it costs you to borrow money.
So basically it is to get money and to manipulate the stock price, whichever is more advantageous to them at the time.
They issue stock to raise money. If they are careful with how much they issue, they won't hurt their stock price much. For some companies in high demand, it is almost like a second IPO, with people clammoring to get a piece and the stock price actually rises.
They will also buy back stock in an attempt to raise the stock prices and increase "shareholder value" this can also make investors happy and also increase the price of the stock from that.
While they don't see any money from that kind of move, and really it costs them some cash flow to buy the stock back, it can help "the numbers" which affect your bond rating and how much it costs you to borrow money.
So basically it is to get money and to manipulate the stock price, whichever is more advantageous to them at the time.
November 21st, 2015 at 1:14:24 AM
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Wizard,
Companies issue shares to raise capital to fund their operations. Equity is much cheaper than debt, especially for a microcap company that no one would want to lend to. That said, penny stocks tend to issue a ton of shares because their stock price is so low. A billion shares sounds a lot, but if it trades for for less than 1/10th of a penny, we talking about a mkt cap of a million.
Most penny stocks are she'll companies. Much like most boiler rooms, they have an address, no real employees or customers, utilize boiler room brokers to push their stock price around. Rarely is their real liquidity in the name. When you try to sell with a limit order, it barely executes because a mkt maker will at times voluntarily choose not to execute.
The next part of the typical scam is to hire some famous person to vouch for the company, pump up the price while the smart money gets out, and then either do a reverse split or fail.
God bless capitalism.
Companies issue shares to raise capital to fund their operations. Equity is much cheaper than debt, especially for a microcap company that no one would want to lend to. That said, penny stocks tend to issue a ton of shares because their stock price is so low. A billion shares sounds a lot, but if it trades for for less than 1/10th of a penny, we talking about a mkt cap of a million.
Most penny stocks are she'll companies. Much like most boiler rooms, they have an address, no real employees or customers, utilize boiler room brokers to push their stock price around. Rarely is their real liquidity in the name. When you try to sell with a limit order, it barely executes because a mkt maker will at times voluntarily choose not to execute.
The next part of the typical scam is to hire some famous person to vouch for the company, pump up the price while the smart money gets out, and then either do a reverse split or fail.
God bless capitalism.
November 21st, 2015 at 2:32:42 AM
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Thanks for the above. What I'm wondering now is even if a company were inclined to keep diluting the stock to raise capital, why doesn't it also keep doing reverse splits to keep the stock price looking legitimate. I thought to get off the "pink sheets" the price had to be at least $1.
"For with much wisdom comes much sorrow." -- Ecclesiastes 1:18 (NIV)
November 21st, 2015 at 5:40:46 AM
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Quote: WizardThanks for the above. What I'm wondering now is even if a company were inclined to keep diluting the stock to raise capital, why doesn't it also keep doing reverse splits to keep the stock price looking legitimate. I thought to get off the "pink sheets" the price had to be at least $1.
The exchanges also have a minimum market cap requirement, so a $10m market cap company with a $10 stock price would still be on the "pink sheets".
November 21st, 2015 at 5:49:21 AM
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I could see not getting angry about it if I was an investor who owned shares worth tens of dollars or more, that had collapsed into penny stocks. At that point, it might be that the only maneuver left is putting more shares out there to sell, hoping the money raised saves the whole enterprise.
the next time Dame Fortune toys with your heart, your soul and your wallet, raise your glass and praise her thus: “Thanks for nothing, you cold-hearted, evil, damnable, nefarious, low-life, malicious monster from Hell!” She is, after all, stone deaf. ... Arnold Snyder
November 21st, 2015 at 8:11:22 AM
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Berkshire Hathaway common stock only has 811,000 shares outstanding and each share currently sells for $204,600.
I guess that is not considered a penny stock.
https://finance.yahoo.com/q/ks?s=BRK-A
I guess that is not considered a penny stock.
https://finance.yahoo.com/q/ks?s=BRK-A
At my age, a "Life In Prison" sentence is not much of a deterrent.
November 21st, 2015 at 8:31:43 AM
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I lived in Denver in the 70's. Buddy had a brother who was a broker in penny stocks. What a con job. Friends and family could buy stock at initial offer, then dump same day or next. Anything with the word SOLAR was a guaranteed winner. Raised several hundred thousand overnight on one stock who's only assets were a college professor and several cans of black paint.
