Everyone know that small cap stocks. micro cap stocks and penny stocks come with great risk. Over the years, I have developed the system to navigate and avoid certain investing pitfalls.
The two main things I look to avoid is Corporations that are Incorporated in the State of Wyoming. Why? It is really quite simple. The State of Wyoming doesn’t have a par value tax on the number of shares issued. This means a company can set up corporations that are authorized to issue billions of shares with no financial (corporate tax) consequence. Our research shows that a number of Wyoming Corporations have two classes of stock, preferred and common. The preferred often control the company and are usually owned by insiders, officers, and founders. Then they authorize billions of shares of common stock. Even though they don’t all get issued the Company can issue up to the authorized number of shares. Example Company ABCD issues 7000 preferred shares that can convert into 70% of the Company. At the same time the Company issues 100,000,000 shares of common stock of their 1 billion authorized. The company can issue up to another 900,000,000 shares. That’s crazy!! What’s even crazier only the Common stock shareholders realize the dilution. The preferred still convert into 70% of the Company.
Take a look at Strike Force symbol SFOR. In its 8K filed on August 4, 2015. The Company increased its authorized from 3 billion to 5 billion. Which, by the way, coincided with yet another reverse the company’s third since 2014. Strikeforce has completed three reverse stock split 1 for 1500, 1 for 650 and 1 for 1000. And with all of these reverses only the common shares get reversed. The reverse has no effect on the preferred shareholders. So the company can issue billions of shares reverse them, issue billions more, reverse it and guess what? The common shareholders that invest in the common stock get screwed and the preferred shareholders never get diluted.
The second item to watch out for is convertible debentures that often turn into death spirals for a large number of Companies. A number of convertible debentures often convert into equity at a fraction of the average closing price. Example the company can convert into shares at a 50% discount to the market. Doesn’t seem unreasonable on the surface except if the note is aged (6 months or 1 year depending on stocks status) the shares become free trading. That means they can be sold in the marketplace immediately. So the debenture holder converts, sells, converts, sells etc and the common shareholder gets diluted with each conversion. But it also adds selling pressure into an often illiquid security and the price drops and with each conversion the conversion price drops and drops and more and more shares are issued. This why a number of companies including Strikeforce are incorporated in Wyoming and why the need to have 5 billion shares authorized.
So it’s simple Wyoming and Convertible Debentures are often a deadly combination.