Convertible Note Market Risk and Misrepresentation

Last week, the New York Court of Appeals opined to The US Second Circuit that the convertible note with the 35 percent discount from a publicly traded stock violates the criminal usuary (loansharking) statute. In this case, a private firm entered into a convertible note with a publicly traded company that had an interest component and an equity conversion component. The interest charge under the note was below the 25 percent criminal usury limit in New York, however, the noteholders option to convert the debt into stock in the company at a 35 percent discount, despite not having a set conversion value at the time of the loan was considered usurious and therefore unenforceable. 

Founding Partner and Manager, Chris Warren states that “lenders are using increasingly sophisticated techniques to induce and manipulate companies into unilateral agreements by taking advantage of the disparity in negotiating power and legal knowledge. Running a profitable business is challenging enough without an unfair and usurious agreement binding them to obscure terms that were intentionally misrepresented or not disclosed.”

Partner and Head of the transactional department, Todd Kulkin states, “Convertible notes are a powerful tool in allowing investors to retain strong returns while providing businesses with much-needed capital while mitigating the investor’s downside risk. Usuary is an issue that must be addressed at the outset so as to protect the investor from exchanging their hard-earned money for unenforceable promissory.” 

If you are interested in using a convertible note as an investment vehicle, or you believe you’ve been the victim of business-to-business loansharking call the attorneys at Warren Law Group at (866) WLGROUP or email info@warren.law for a complimentary assessment.

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Warren Law Group

WLG provides legal representation to financial services professionals and business owners in regulatory and compliance matters, litigation, and securities.