Hamilton & Associates Law Group, P.A.
Toxic Convertible Note Lenders Not Just For the SEC Anymore
Over the past few years, we’ve written frequently about so-called “toxic lenders” and the toll their loans take on struggling over-the-counter companies. Nearly all of these companies need financing for operations, research and development, expansion and more, and are rarely able to obtain it from banks or other traditional lenders. They turn instead to the toxic funders, who charge high interest and, in the end, almost always convert their notes into enormous amounts of unrestricted stock. That causes runaway dilution, which damages the companies and their investors, and can result in reverse splits and even bankruptcy. Since 2017, the Securities and Exchange Commission (“SEC”) has been trying to deal with the problem by suing the lenders for acting as unregistered dealers. Though they’ve won one important victory—against Ibrahim Almagarby and his company Microcap Equity Group LLC—and others are waiting in the wings, preparing and prosecuting individual lawsuits is time-consuming and expensive. The SEC has another remedy in mind, which entails changing the way note conversions work under Rule 144, but the rule change has yet to become effective. In the meanwhile, issuers victimized by toxic lenders try to fight back as best they can.
1|Page