RE: Undervalued for a reason8 Feb 2023 23:45
The forward sellers make their profits at the expense of pre-existing (and often long-term) shareholders, who’s stakes are diluted and hence devalued.
The buyers of the forward sellers’ shares may not be aware of what is going on (that was certainly the case in the Nighthawk example) and are purchasing shares that the company is issuing at a price that is inflated relative to the issue price. In the New World case, anyone buying shares from the forward seller at 0.075p was paying 36% more than they could have paid, had the company made the shares directly available to investors.
A less obvious problem is that for this practice to succeed, there needs to be a strong market for the shares that the company is issuing to the forward sellers. In my experience, one often finds very bullish comments about the worth of the company at such times, which can mislead investors and encourage them to overpay. In the case of New World, investors ultimately found themselves with worthless shares, as the company subsequently delisted.