I've never heard of a warrant restriction like that. Normally a warrant is identical to a call from the holders perspective. Thus 100,000 warrants at $2.50 would give the holder the right to convert them to 100,000 shares at $250 per share. The difference between warrants and calls is that the 100,000 shares are actually new shares rather than already issued shares. Although they may be already issued shares being held by the company. The bottom line is that the issuer of the warrants covers by delivery if the price is above the strike price, and if it is below they expire worthless.
Piranha, the limited knowledge I have from exercising warrants totally agrees with you statement:
“The difference between warrants and calls is that the 100,000 shares are actually new shares rather than already issued shares. Although they may be already issued shares being held by the company. The bottom line is that the issuer of the warrants covers by delivery if the price is above the strike price, and if it is below they expire worthless.”
The issuer of the warrants has to account for all the shares with the SEC (?) as they are potentially dilutive if redeemed above the ‘strike price’ in this case $2.50.
However, the issue of the warrants, to the best of my knowledge, generally do have tax consequences (no surprise there), good and bad, for both the issuer and the recipient. In the case of the issuer, depending on how the issue is done, they get certain tax credits (which I am not knowledgeable about). And in the case of the recipient, within a short period of time after the grant, taxes are due on the difference between the grant price and the strike price; for instance, if you pay $1.94 and the strike price is $2.50, then you have to pay taxes on the difference, in this case 56 cents.
But after that, the recipient pays no further taxes. So if the stock goes to $9.00 the $6.50 gain is tax-free. Nice deal huh? Wish I could have gotten in on it.
So the key here is that it is an incentive deal, otherwise why would you buy the warrants? Yes, it is a cashless exercise to the company as it costs them essentially nothing except the cost of tax, SEC and contract attorneys, just like they went public for the first time and it puts even more money in the bank for the company.
If you recall, during the dot com madness, tons and tons of ‘free shares’ were issued. A lot of people made great money, but those who came late to the party got really screwed as they had paid for the stock and the taxes and were under water when the company went BK or worse, they had taken a loan for the stock and the IRS payment and were now open game for the creditors or had not paid the IRS and were, well you know.
So the real bottom line is at what price do the warrant holders sell? And like in all markets, some have to sell with a small gain and some can hold on for a really big gain. Ain’t investing fun?
Yeah most of the time warrants are an added perk to a private placement. If the warrant conversion is already factored in to counter balance an earlier short then there won't be much effect on the share price. I believe any dilutive effect has already been factored in and that they would at least hold the shares until it became a long term capital gain instead of a short term one assuming that they didn't already short from higher levels. They will convert most likely, but I would think they would hold and sell calls for income on the shares. At least thats what I would do most likely in that situation.