In the late stages of shareholder value destruction, there is an obscure form of corporate hospice known as death spiral financing. Such financing is infinitely dilutive because it allows creditors to receive shares at a discount to the market price regardless of that price. So what is the intrinsic value per share of companies that accept such financing? Zero. Why would they do it? They generally have limited options and are desperate. This financing is a wealth transfer mechanism from public shareholders to insiders, who can squeeze a few more paychecks out of the companies while the checks still clear.
So, what is to be done? While this type of financing gets publicly disclosed, it is difficult to exploit for profit since the companies are small, nearly worthless, and hard to short. In terms of defense, it should go without saying that it is probably a bad idea to buy such stocks or to trust any broker who tries to sell them to you. In terms of offense, this presents an attractive whistleblower opportunity. You can seize this opportunity if you are familiar with these companies or the institutions that extend them death spiral financing. Over the past three years, the SEC has awarded fifteen whistleblowers with payouts of almost $50 million. Awards average over $3 million. They range from 10-30% of money collected in a case. Legal expenses are surmountable; the key need is firsthand, original, high-quality information in order to bring a case.
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