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Is There an Alternative to Litigation for a Microcap?

Updated: Aug 7, 2021

Why an Alternative to Litigation is better for Lenders and Funders:

Over the past couple of years, I have seen more and more microcap lenders suing microcap companies that have defaulted on their loans. This is a disturbing trend and those lenders who have not started litigation against clients who are in default are strongly considering it. Is litigation really the best answer? If a lender sues and wins against a microcap company and/or the CEO who personally guaranteed the loan, who really wins?

Many of these loans are tied to company stock. Most microcap CEOs I know who have guaranteed loans are so broke they can’t even pay attention. The company and the CEO have no means to repay the loan, so is it really worth it to sue? What if the companies who are in default were able to get themselves back on their feet and provide a means to pay back their lenders? This is possible through a restructuring.

The restructuring has to be done in the correct way however. A proper restructuring of a microcap company would involve converting all (or most) debt into a new class of stock. Other debts would be converted into a different class and so on. With a reasonable cap structure post-restructuring and traditional, long term funding in place, the company will be able to proceed on execution of their business plan.

The only drawback for lenders is that it requires you to take a longer view and essentially become an investor in the company. It’s a much better alternative than a lawsuit whereby you might take over some assets or beat a few dollars out of a broke CEO.

Other key benefits of a company restructuring is:

Restructured companies stand a much better chance of increasing in value in the marketplace. Investors of microcap stocks have realized that the only way their investment is going to appreciate in value is to invest in a company that is not doing any form of significantly dilutive financing such as debt financing.

Restructured companies with little or no debt are much better opportunities presented to Investment Banking Firms that we introductions to our clients.

Lender/Funders essentially become investors in the microcap company once restructuring is complete. This possibility exists that they could not only get 100% of their money out of the restructured microcap, but stand a chance of making more through their “investment”.

A restructuring and workout is much better for all involved; only the attorneys make out and win in litigation cases against microcap companies.

Several funders who see the value in what we are doing have already approached us. They realize that the path of least resistance is actually a longer path but creates a win-win for everyone involved. Especially in light of the scrutiny many of these lenders are now under by the SEC for failing to register as a dealer under the ACT. Federal securities laws dictate through statute, that these transactions are void and unenforceable. However, this does not stop the toxic lender from filing a lawsuit to try to collect.

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