What is a "gypsy swap"?

By Justin Bynum AAA
A:

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.

RELATED FAQS

  1. Why do investors with minority interest receive a minority interest discount and ...

    Discover why investors with minority interest usually receive a discount to the fair value of their ownership share, and ...
  2. How has the Internet impacted Value-Added Network (VAN) providers?

    Discover how the advent of the Internet has challenged the Value-Added Network, or VAN, model of distributing electronic ...
  3. Why would a company choose to repurchase in lieu of redeem?

    Learn the difference between a stock repurchase and a stock redemption, and find out about the reasons why a company might ...
  4. How does the privatization of a publicly traded company work?

    Find out how a publicly traded company can privatize and remove itself from listed stock exchanges and out from under the ...
RELATED TERMS
  1. Separation Of Powers

    An organizational structure in which responsibilities, authorities, ...
  2. Protected Cell Company (PCC)

    A corporate structure in which a single legal entity is comprised ...
  3. Registered Holder

    Shareholders who hold their shares directly with a company.
  4. Duty Of Loyalty

    A director's responsibility to act at all times in the best interests ...
  5. Duty Of Care

    One of two primary fiduciary duties of directors, the duty of ...
  6. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...

You May Also Like

Related Articles
  1. Stock Analysis

    Is It Time To Shun Altria Group?

  2. Stock Analysis

    Free Cash Flow Separates Delta From ...

  3. Stock Analysis

    How Realty Income Became A Top Dividend ...

  4. Stock Analysis

    Is Ariad On Track To Lose More Shares?

  5. Stock Analysis

    How Will Chesapeake Energy Create Value?

Trading Center