A gypsy swap is a unique method by which a company may raise capital without issuing debt or holding a secondary offering. In many respects, a gypsy swap is similar to a rights offering, except that the restricted party's equity claim does not elapse and the swap instantly becomes dilutive. (To learn more about rights offerings, be sure to read Understanding Rights Issues.)

The gypsy swap is broken into two parts:

1. An existing shareholder exchanges freely traded shares for restricted shares (shares restricted by time and/or price constraints) from the issuing company. In economic terms, the existing shareholder neither gains nor loses money from the transaction, although it may have tax consequences.

2. The issuing company then sells the existing shareholder's freely traded shares to a new investor(s) at a price that may be higher or lower than the current market price. The issuing company now has additional capital and the new investor(s) has equity in the issuing company.

In almost every case, a gypsy swap is a last-ditch financing option because the new investor(s) almost always demands some combination of below-market value price or special consideration from the deal. In fact, if the issuing company could raise funding conventionally - internally from the equity markets or from the debt markets - it certainly would choose to do so.

This question was answered by Justin Bynum.

  1. What do states do with unclaimed property?

    Unclaimed property refers to personal accounts in financial institutions or companies that have had no activity and whose ... Read Full Answer >>
  2. How do financial advisors execute trades?

    Today, almost every investor invests through online brokerage accounts. Investors often believe that their trades are directly ... Read Full Answer >>
  3. What are ComputerShare's escheatment services?

    Escheatment is the process by which ownership of abandoned property is transferred to the state. Escheated property can include ... Read Full Answer >>
  4. How does escheatment affect a company's shareholders?

    Escheated property in the United States is a designation for personal property such as bank accounts, shares, insurance proceeds, ... Read Full Answer >>
  5. What are the main risks associated with trading derivatives?

    The primary risks associated with trading derivatives are market, counterparty, liquidity and interconnection risks. Derivatives ... Read Full Answer >>
  6. Should you calculate Value at Risk (VaR) for counterparty credit risk?

    Value at risk (VaR) calculations may be helpful for risk management when trading credit default swaps and other derivatives ... Read Full Answer >>
Related Articles
  1. Stock Analysis

    The Top 5 Apple Shareholders

    Learn about insiders and institutional investors with large positions in Apple. Read about Carl Icahn's activist campaign against Apple.
  2. Investing

    Wal-Mart's Share Repurchase Isn't All Good

    Wal-Mart announced huge internal investments along with an aggressive share repurchase program that isn't as good as it initially sounds.
  3. Fundamental Analysis

    Using Decision Trees In Finance

    A decision tree provides a comprehensive framework to review the alternative scenarios and consequences a decision may lead to.
  4. Investing Basics

    What are the fiduciary responsibilities of board members?

    Find out what fiduciary duties a board of directors owes to the company and its shareholders, including the duties of care, good faith and loyalty.
  5. Bonds & Fixed Income

    Credit Default Swaps: An Introduction

    This derivative can help manage portfolio risk, but it isn't a simple vehicle.
  6. Economics

    Currency Swap Basics

    A currency swap involves two parties exchanging a notional principal and interest to gain exposure to a desired currency.
  7. Economics

    What's a Horizontal Merger?

    A horizontal merger occurs when companies within the same industry merge.
  8. Investing

    A Breakdown Of Stock Buybacks

    Find out what these company programs achieve and what it means for stockholders.
  9. Investing Basics

    How MasterCard Pulled Off a Buyback

    Stock buyback refers to publicly traded companies buying back their shares from shareholders. Why would they do that?
  10. Economics

    3 Notorious American White Collar Criminals

    Learn about the crimes and punishments of some of the most infamous convicted white-collar crooks.
  1. Swap

    A derivative contract through which two parties exchange financial ...
  2. Credit Default Swap - CDS

    A particular type of swap designed to transfer the credit exposure ...
  3. Employee Stock Option - ESO

    A stock option granted to specified employees of a company. ESOs ...
  4. Corporate Culture

    The beliefs and behaviors that determine how a company's employees ...
  5. Sticky Wage Theory

    An economic hypothesis theorizing that pay of employees tends ...
  6. Earnings Before Interest & Tax - EBIT

    An indicator of a company's profitability, calculated as revenue ...

You May Also Like

Hot Definitions
  1. Bar Chart

    A style of chart used by some technical analysts, on which, as illustrated below, the top of the vertical line indicates ...
  2. Bullish Engulfing Pattern

    A chart pattern that forms when a small black candlestick is followed by a large white candlestick that completely eclipses ...
  3. Cyber Monday

    An expression used in online retailing to describe the Monday following U.S. Thanksgiving weekend. Cyber Monday is generally ...
  4. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
Trading Center