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MBGM Capital Inc

Asset Backed Finance: Creative Finance Solution to a Major Challenge--restricted stocks

Sunday, June 13, 2010 - Article by: MBGM Capital Inc - Message

Asset Backed Finance: Creative Finance Solution to a Major Challenge

You or your clients are senior officers, insiders, directors or affiliates of publicly traded companies, you have liquidity requirements either to expand or acquire new companies or invest in new ventures. Even if we did not have liquidity crisis today, it would take months to acquire liquidity, so why not leverage your assets that you own?

What assets are we talking about? What challenges are we talking about?

We are talking about restricted securities (stocks), and the challenges that we are talking about comes in two factors, external and internal, both will be discussed later the in the article. Senior executive's or other insiders compensation most often comes in the form of restricted stock, which must be held for a length of time before it can be sold(see below for more info). Rather than sitting on these assets for the required time, savvy investors are leveraging restricted stock loans as a new way to improve liquidity and use that liquidity to work for them.

Senior executives are defined by the SEC as "insiders," along with officers, directors or key employees of the corporation, a person owning 10 percent of the company's stock, or anyone with inside, or non-public, information.

According to SEC rules on holding period, if the company that issued the securities is subject to the reporting requirements of the Securities Exchange Act of 1934, then you must hold the securities for at least six months. If the issuer of the securities is not subject to the reporting requirements, then you must hold the securities for at least one year. The relevant holding period begins when the securities were bought and fully paid for. The holding period only applies to restricted securities. Because securities acquired in the public market are not restricted, there is no holding period for an affiliate who purchases securities of the issuer in the marketplace. But the resale of an affiliate's shares is subject to the other conditions of the rule.

For more information, please visit SEC website regarding 144

It is estimated that there are over a trillion dollars worth of restricted securities (stock) trading on the U.S. stock exchanges held by those corporate officers, directors and affiliates of publicly traded companies as well as both institutional and accredited investors. As you will discover, most of this restricted stock is almost worthless to its holders as their ability to liquidate these shares has been heavily restricted by the Securities Exchange Commission (SEC) to protect public investors and the viability of the issuing company itself.

Just like every industry, when there is a challenge, there is a solution, this challenge gave birth to the Stock Lending Industry to meet the demand of shareholders seeking liquidity from their shares without selling, private lending companies began lending on free trading and restricted securities in the early nineties with some degree of success.

However, as the industry grew, more challenges began to arise, as some lending firms began to use hedging strategies that were risky, and often would result in the inability for a borrower to reclaim their shares once the loan had been paid off.

Another major challenge that developed was that these loan programs caused many suits and began to come under scrutiny by the IRS or SEC, resulting in governmental litigation and a lot of unclear opinions as to what constituted a loan, what constituted a sell, and how one should be able to borrow against their restricted securities.

The New Solution: creative lender comes up with a great solution.

A new finance solution emerged that would revolutionize the industry and solve every challenge that lenders, borrowers, and agents had faced in the past, with the input of several key members of various regulatory authorities (SEC, Federal Reserve Board, and U.C.C. ) and various experts, including attorneys and tax professionals.

The best part about this solution is that it's fully compliant with the rules of various agencies; it's a solution where you can obtain a loan and still allow the shares to remain the borrowers' name.

This solution can be used by either individuals or corporations who issue these restricted stocks. These owners of these securities can borrow up to 80% of the assets value at interest rates as low as 4%, with terms ranging from 1-7 years, and the transaction is 100% private with no filings required.

Benefits of using a specialized professional:

Just like every unique requirement, such a health challenges or litigation challenges, you would go and seek a professional who specializes in those types of challenges, because they have been there and have been trained to handle those types of challenges. Well you might say big deal.

It is a big deal in this challenge because it means that a borrower will never have to worry about whether or not those shares will be returned when the loan has been re-paid, because they are safe and sound for the duration of the loan. The borrower never has to be subjected to carrying the full liability of the loan, attach other assets, provide personal guarantees or be concerned with their creditworthiness. The lender has no access to the shares which guarantees that the stock will never be traded, shorted, sold or exposed to any other type of risk.

But wait a minute... you might be asking yourself why these shareholders can't just go to a local bank or brokerage house, and obtain financing against their shares.

Actually they can, (however most of them do not specialize in restricted stock loans) but the real question is would they really want to?

You see, banks and broker/dealers generally charge margin or maintenance fees, cannot offer LTV's higher than 50%, usually charge high interest rates, and require personal guarantees and credit checks. The most important thing you should know is that they typically will not even lend against restricted shares to begin with, especially those that are not marginable.

Most private lenders on the other hand, can offer non-recourse loans with much higher LTV's, much lower interest rates, do not require personal guarantees (other than the pledged shares), or credit checks. Most private lenders however, typically cannot or will not lend against restricted shares, without the transfer of ownership. Simply stated, it is this finance solution, which offers the same features as other private lenders however the one major difference is that this finance solution will lend against restricted shares, and allow the shares to stay in the borrowers name, all in a non-recourse type financing environment... an industry first.

So what does it all mean?

It means that shareholders holding restricted securities now have a viable option to allow them to receive much sought after capital without selling their valuable stock. They can use the proceeds for lucrative endeavors, such as purchasing real estate, starting a new business or recapitalizing an existing one, funding a great project (green energy) or simply making a life-long dream come true.

For Information only: "Not an offer to buy or sell securities. No Legal, tax, insurance, or financial advice of any kind is provided. Please consult with a licensed professional for guidance on any of these matters. All loan program information is understood to be true and accurate at the time of this publication".

Karna Hoskote



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