Understanding Section 3(a)(9) Exchanges and Conversions as Related to Convertible Promissory Notes
As an attorney specializing in the representation of companies and investment funds in the micro, small and mid cap arena, we work on corporate financing transactions involving convertible debt almost daily. These transactions provide a tremendous amount of benefit to these small cap companies, in that they obtain cash today that will be repaid with common stock tomorrow. Financing using convertible instruments that are repaid with stock is one of the many reasons an entity may choose to go public. However, the financing comes at a price including both dilution to existing stockholders and likely a reduced stock price resulting from the selling pressure when the debt is converted. Of course, all financing has pros and cons and public entities need to consider
Convertible Promissory Notes; Flexible Financing Options
I have explored the topic of promissory notes in previous articles. This analysis shall specifically concentrate on convertible promissory notes.
As a reminder, a promissory note is a written promise by a person, persons or entity to pay a specific amount of money (called “principal”) to another, usually to include a specified amount of interest on the unpaid principal amount. In addition, a promissory note will include the basic specifics of the debt, including the debtor and creditor, when payment or payments are due, interest rates, if the debt is secured, and whether the debt may be converted into stock or other equity. A promissory note that may be converted is often referred to as either a debenture or a convertible promissory note.
Notes Can Be Sold or Assigned
Unless specifically prohibited in the language of the note, a promissory note is assignable by the lender. That is, the lender can sell or assign the note to a third party
