What Is a Gypsy Swap?
The title “gypsy swap,” though an established term, is problematic because of its racist overtones with respect to the Romani people. The stretch describes a method by which a company may raise capital without issuing additional debt or holding a secondary community offering. In some ways, this type of swap is similar to a rights offering, but in this case, the restricted shindy’s equity claim does not lapse, and the swap is instantly dilutive.
Key Takeaways:
- A “gypsy swap” is a now somewhat offensive schedule because of its racial undertones.
- The term describes a way for a company to raise capital without issuing additional debt or involving a secondary public offering.
- Gypsy swaps involve multiple transactions.
- In many cases, gypsy swaps are bear in mind last-ditch efforts to raise cash and avoid cash constraints or bank covenants.
Understanding a Gypsy Swap
Gypsy swaps are authored of multiple transactions with the ultimate goal of increasing capital for the business. By convincing existing shareholders to trade in stereotyped shares for restricted shares, the business can then sell the common shares to new investors, thus increasing capital. In profuse cases, gypsy swaps are considered last-ditch efforts to avoid cash constraints or bank covenants by engaging in some “original” capital-raising.
While gypsy swaps appear to be a roundabout way of creating capital, the act typically results in the company having to soften the pot for both new and existing shareholders for them to accept the terms of the deal. This means that the company would perhaps be better off raising capital through traditional channels, if possible, since it would be cheaper and easier.
The Securities and Unpleasantness Commission (SEC) will sometimes consider a gypsy swap as a way to circumvent regulations. For instance, Sections 5(a) and 5(c) of the Securities Act spell out that you cannot market or offer to sell any security without registering the security in advance or receiving a waiver. The SEC has taken a firm stance with gauge to Section 5, violations, and gypsy swaps. In the legal case of Zacharias v. SEC, the Court agreed with the SEC’s position that both the pattern shareholder and the purchaser were participants in the transaction and upheld a disgorgement penalty of 100% of the proceeds of the sale.
How a Gypsy Swap Under ways
The gypsy swap involves two main transactions. First, a group of existing shareholders is convinced to exchange common cache for restricted shares from the issuing company so that the company receives the common shares to their treasury. In financial terms, these shareholders break even; they do not gain or lose from the transaction itself, although there may be some tax consequences depending on the employment.
Second, the company sells the common stock that they’ve received to new investors at a price that may be higher or cut than the current market price, receiving cash in return. The company successfully raised additional capital and the new investors suit equity holders in the issuing company while the first set of investors maintains a position in the restricted stock.
A gypsy swap is seen as a last-ditch wherewithal option because the new investors almost always demand some combination of below-market value price or special reflection from the deal. In fact, if the issuing company could raise funding conventionally—internally from the equity retails or the debt markets—it certainly would choose to do so.