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Reverse split

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  • This topic has 1 reply, 1 voice, and was last updated 1 month ago by .
  • #326895

    Brad
    Participant

    Okay… so a little vent session.

    WHY ARE PRE-IPO REVERSE SPLITS A LEGAL THING????

    From what I’m reading this is happening more and more often to reduce outstanding share quantities and raise IPO stock price to make it look more attractive.

    Rather than having 1000 shares at $0.50 I would have 100 $5.00 shares at the $5.00 IPO listing?!?!?!?!?!

    Looks like highway robbery of that 10x capital gain to me.

    Somebody let me know if I have totally misunderstood this thing.

    Thanks

    Brad

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      • Merlynmac
        Participant
        #327221

        I’m not sure why it would be considered robbery. Your stock value of $500 remains the same. To get 10x at the $0.50 price, the stock would need to get up to $5 per share, and at the $5 price, it would need to get to $50. In each account, your total holdings would gain $4500 in value.

        What am I missing?


        • Brad
          Participant
          #328650

          I do understand that there is the minimum stock value for listing on the major markets, and maybe in this case, the example I used was not the best. The Wall Street article I was reading stated that the reverse stock split is a growing trend, although dated (this was the most recent article I could find on it dated 2010). Over a 2 year period 2008-2010, 61.5% of companies that IPO’d did a reverse stock split, up from 53% during 2005-2007. Now it also doesn’t discuss the magnitude of the consolidation of stocks either, I would imagine those are not just penny stock companies raising stock prices to get to the major markets, but that is just speculation. Just has me concerned with the risk of Angel Investing and the growth potential target of the investments, doesn’t seem (fair isn’t the right word)… that the private equity gains (or some percentage of) are consolidated out of the equation before the IPO.


        • Brad
          Participant
          #327231

          So the example I used was from one of the articles I read on it. But yes your value ($500) remains the same. But rather than having 1000 shares with a cost basis of $0.50 that after the IPO would be 1000 shares at $5.00 each, the shares are truncated down to 100 shares at a $5 cost basis losing the gains at the IPO share price of $5.


        • Alan S
          Participant
          #327252

          Also, it’s important to note that any stock under $5 is considered a penny stock & therefore large institutions are restricted from investing in due to perceived higher risks.  I think that makes a big difference if a company is planning an IPO.

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