I Almost Bankrupted By Purchasing 1 Million Shares Priced at 0.1 Cents. Part-1: Story
A rare complex financial trap/mess I experienced.
First of all, I admit that I am a financial layman. I bought the first versions of the iPod, iPhone, iPad, and even Titanium Powerbook (the original version of the current MacBook Pro series), but I did not buy Apple shares. So naturally, I didn’t get rich. Fair enough. However, a spur-of-the-moment $1,000 publicly-traded stock buy brought me dangerously close to bankruptcy. Yes, merely $1000. By usual logic, the most loss was $1000, right? How come it almost bankrupted me?
The event was that I bought one million shares for $0.001. Yes, you read it right: a share is priced at 0.1 cents, properly listed on the ASX (Australian Share Exchange).
The company BrisConnections (BCS) builds roads and tunnels in Brisbane. The company is quite well known to Brisbane residents (seeing its name on roads), and brochures.
I watched the news about recording low share prices under a cent, and I started paying attention to it. One day, its share price plummeted to $0.001.
“BCS shares fell 59 per cent on the opening day of trading. It continued to slide down to $0.001 as the markets fell.” — “Brisconnections — lessons to be learned”
The greedy part of me took control. Without much thinking, I bought one million BCS shares at $0.001 for only $1000. I naively thought the price was the lowest it could be, and the only way was to go up. If I sold them at 1 cent, I would make a 900% profit.
However, there was a catch, which I realized a few days later. This share is on a partly paid structure, which had an A$2 liability to be paid in two A$1 installments over the 18 months after listing.
“Many retail investors bought into the stock without realising that there was a liability attached and now face significant calls (Aus$1,000 of stock purchased at Aus$0.001 effectively creates a Aus$2m liability).” — source
Put simply, I needed to pay A$1 million within a few months and an additional A$1 million at a later date. I don’t have that amount of money, so I would go bankrupt if I kept these shares.
I took immediate action: selling the shares (all of them). It was a tense few hours as I anxiously watched the screen, but eventually, they were all sold. What a relief! Thankfully, my losses were limited to trading fees.
Naturally, this incident gathered media attention. I was keeping a close eye on this fiscal disaster. Numerous anxious new BCS shareholders find themselves unable to offload their shares (no buyers). Meanwhile, BCS released a statement, conveyed through their legal representatives, indicating their intention to pursue the shareholders for the subsequent instalment payment.
This event escalated quickly. Apparently, the number of recently bought $0.001 shares is quite big. The mounting pressure forced the Macquire Bank (the one behind BCS, the larget investment bank in Australia) to announce it would buy back some shares within a limit. Obviously, this is not a solution.
In the meantime, more (bad) news about BCS will be released. By the way, the company had money and still operated. (The woe is caused by the poor outlook due to poor management, then amplified by this instalment share scheme). The chairman of the BCS board, a famous figure, is also a chairman of the state government’s largest investment entity. This chairman still charged BCS ~A$50,000 (from my memory) for attending one meeting (regularly) , and he had X number of yachts …, etc. $50,000! in contrast with a $0.001 share, no wonder people were angry.
Then, the ‘savior’ came. One young investor, X, announced in the forum that he would buy shares back at $0.001, as much as possible. Not only that, he stated a good cause. “BCS is poorly managed; this instalment share scheme is flawed. Once he had enough shares, he would request a General Meeting and vote to wind up the company, …, etc. If the company is gone, there are no more instalments”. What a hero! (wait, the climax twist later)
Soon, X became one of the largest shareholders of the BCS, with nearly 20%. Really, it didn’t cost much. Individual shareholders were more than happy to sell to him at $0.001 at a huge discount on their purchase price. Even I (as a past shareholder) wanted to see how he punished those fat cat executives.
Why was he so brave? Owning BCS shares meant a huge amount of debt (2000X). According to rumours, X operated with a company called ASI (Australian Style Investments) via his retired father’s account. In other words, bankruptcy is not a big deal for him. Many people in the forum shared their respect for his courage and smartness.
The proposed BCC general meeting was announced, and we were eager to see the outcome. Clearly, the current board and executives would fail.
However, it did not happen. Before the vote, X had a behind-the-door meeting with the board members. X sold out his (cheaply bought) shares to the board, making millions of dollars outright, and walked away.
The angry shareholders felt cheated (again, the first was the instalment share scheme).
The rest is pure cover-ass politics. An interesting story, right? It is real, and aligns with what is reported by the news. The BCS disaster timeline (source: IGlobal)
“May 2008 — institutional equity commitments made
Jul 2008 — stock listed and fell 59 percent on first day of trading
September 2008 — Macquarie commenced selling down its holdings
Nov 2008 — BCS shares drop to Aus$0.001 per share (the lowest price allowable by the ASX)
Nov 2008 — Macquarie ceases to be a substantial shareholder
Mar 2009 — Australian Style Investments (ASI) increased its stake to 19.8 percent and forced the management to a General Meeting of shareholders to vote on a resolution to wind up the company, as well as other resolutions such as the deferment of the second instalment and reinstatement of the dividend
Mar 2009 — Macquarie stepped into the market to buy around 8 percent of the stock such that between it and two other major shareholders they would have over 25% of the stock and could have blocked the wind-up vote
Apr 2009 — Thiess, the project construction contractor, purchased ASI’s proxy votes (not the shares) for A$4.5m. As a consequence, all the resolutions at the General Meeting were voted down. ASI remains liable for the first call on its 77m shares.”
In the next article, I share my lessons I learned from this experience.
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