Ann: Trading Halt, page-76

Time to learn how running a business works.

A CR is essentially a financing tool, not much different to taking out a loan except better for shareholders than taking out a loan. Imagine you jointly own a property worth $500,000, equal shares with 5 people. It's in a great location, big block, total roach-infested dump of a house on it, though.

The block could be subdivided and sold as 4 vacant lots, each likely to sell for $250,000. But demolition and legal costs come to $40,000. None of you can get together that money. No bank will give any of you a loan. Along comes Jack and says, "hey, I'll give you $40,000 to use to subdivide in return for an equal share in the property."

Up front, if you agree, your share is diluted to $90,000. Meanwhile, Jack has basically turned $40,000 into $90,000 just like that. Maybe that seems unfair. Maybe you'll tell the other share holders you don't agree. If you don't agree, though, you've just given up turning your $100,000 share into $166,000 once Jack's money is used to finance subdivision, on a matter of principle.

That's basically the point of a CR. Only on a spec it's even dumber to object since you risk the value dropping to nothing if it can't proceed to a marketable product.