This term sheet summarizes the principal terms with respect to a potential private placement of convertible preferred equity securities. It is not a legally binding document, but rather a basis for further discussions.
New Jersey Convertible Preferred Equity Securities Term Sheet
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A "convertible security" is a security?usually a bond or a preferred stock?that can be converted into a different security?typically shares of the company's common stock. In most cases, the holder of the convertible determines whether and when to convert.
Convertible preferred shares can be converted into common stock at a fixed conversion ratio. Once the market price of the company's common stock rises above the conversion price, it may be worthwhile for the preferred shareholders to convert and realize an immediate profit.
Convertible preference shares usually carry rights to a fixed dividend for a particular term. At the end of the term, the company can choose to convert it into ordinary shares or leave them as they are. Conversion prices must be specified in the company's constitution.
By this logic, the convertible bond allows the issuer to sell common stock indirectly at a price higher than the current price. From the buyer's perspective, the convertible bond is attractive because it offers the opportunity to obtain the potentially large return associated with stocks, but with the safety of a bond.
Convertible preferred stocks are preferred shares that include an option for the holder to convert them into a fixed number of common shares after a predetermined date.
However, convertible preferred stock also has several drawbacks, such as dilution of ownership, lower dividend rates, higher costs, and risk of conversion.
Bonds offer investors regular interest payments, while preferred stocks pay set dividends. Both bonds and preferred stocks are sensitive to interest rates, rising when they fall and vice versa. If a company declares bankruptcy and must shut down, bondholders are paid back first, ahead of preferred shareholders.
Preference shares are shares of a company's stock with dividends that are paid out. Bonds often have a maturity date, while preference shares do not. Bondholders have a higher chance of being paid in bankruptcy versus holders of preference shares.
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