FCL (Floating Convertible Loan) PIPEs (Private Investments in Public Equities) are convertible securities* investments that are expected to generate 20%-30% (or more) returns in 2-4 month periods**. These investments are intended to be virtually market-risk-free investments. They are structured so that investors can earn the above returns regardless of the stock price performance of the issuing company. In particular, when investors convert their convertible securities into shares of common stock, they effectively receive shares of stock from the company at a 20%-30% (or more) discount to the market price. Therefore, at conversion time, at the end of the short life (2-4 months) of the convertible, PIPE investors profit, by the amount of the discount, when they liquidate their newly issued shares at the market price.

The Investment Period of FCL PIPEs
In a typical PIPE transaction, a publicly traded company raises capital by issuing/selling convertibles to investors. This transaction allows the company to raise money very quickly, in about 2 weeks. When a company issues convertibles in a private placement, it does not need to wait for an approval by the SEC and, therefore, is able to raise money immediately. By contrast, if a company instead raises money by issuing shares of common stock, it must wait a few months for the registration process to be completed by the SEC. Thus, issuing convertibles is a much quicker method of raising money.

When a company issues convertibles for a PIPE transaction, it must also simultaneously file for the registration of new/additional shares of common stock. It must register new shares of common stock in order to be able to issue them to the convertibles investors when these investors decide to convert their convertibles into new shares of common stock. However, the SEC registration process of common stock issues often takes 2-4 months. Therefore, PIPE investors are unable to immediately exercise their right to convert the convertibles into shares of common stock since they usually have to wait 2-4 months for the new common share issues to be declared effective/approved by the SEC.

The Investment Returns of FCL PIPEs
In PIPE transactions, the convertibles are structured so that when investors convert them into shares of common stock, the resulting cost (or cost basis) of those common shares is the current market price minus a 20%-30% (or more) discount***. Investors therefore buy the convertibles so that 2-4 months after buying them, when the company's new common share issues become effective (approved by the SEC), they can convert them into shares of common stock to liquidate the shares at the market price and thus earn 20%-30% (or more) returns.

Risks of FCL PIPEs- liquidity, bankruptcy, good standing and management
PIPEs are designed to be win-win situations for their investors and the issuing companies. PIPE investors expect to earn 20%-30% (or more) returns in 2-4 month periods and companies expect to successfully raise money very quickly, in about 2 weeks. Furthermore, PIPE investments are very attractive since their investors essentially face no market risk. The ultimate risk that investors face is the risk of the issuing company going bankrupt and stopping trading. If this happens, the investors have to wait for the lengthy bankruptcy proceedings to recover some of their equity. Therefore, before financing a company, bankers must do their due diligence carefully to make sure that the underlying company will not go bankrupt for at least the duration of the PIPE transaction-from the purchase of the convertibles to the liquidation of the common shares. Underwriters should also make sure that the company is in good standing and that the management of the company will be diligent in registering the new share issues. For instance, the transaction terms should penalize the company with an additional 2% monthly return for the investors, if the new common stock issues take longer than 3 months to become effective. Bankers should also secure that the issuing company's stock has enough trading volume to allow investors convert their convertibles to liquidate all the corresponding shares of common stock shortly after they are able to exercise their right to convert (that is, after the new common shares of the company become effective). Finally, for diversification purposes bankers should also limit their allocation of capital to amounts lower than 10% of the issuing company's market capitalization.

* Securities that can be converted into common stock (e.g. convertible preferred stock, convertible debentures)

** Disclaimer: 20%-30% (or more) returns in 2-4 month periods are not guaranteed. This report is intended to give a simplified description of FCL PIPEs and by no means represents a detailed explanation. The information contained herein represents an interpretation and analysis that is not guaranteed as to accuracy or completeness. This report is published solely for information purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy any security. Recommendations made in this report are intended for investors who are aware of, suited to, and financially able to bear the risks involved. Past performance does not guarantee future performance. Forward looking statements that relate to future events or future financial performance can only be predictions and the actual events or results may differ from those discussed due to, among other things, those risks described above.

*** For example: (Number of shares to be received upon conversion) = (Face Value of Convertible)/(Conversion Price), where the conversion price is either 120% of the closing bid of the common shares at the convertible-issuance-date or 80% of the closing bid at the conversion-date.