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It may have been outright illegal though. You're taking money from your future shareholders. This may very easily be seen as securities fraud, because you're ba

It may have been outright illegal though. You're taking money from your future shareholders. This may very easily be seen as securities fraud, because you're basically selling shares in your company despite knowing that it's massively overvalued.

jacksonkmarley 6y ago
It seems like the SEC thinks it's (potentially) ok as long as you release all the pertinent information. https://www.sec.gov/corpfin/sample-letter-securities-offerings-during-extreme-price-volatility https://www.sec.gov/corpfin/sample-letter-securities-offerin...
chii 6y ago
Exactly the reason why Hertz did not proceed to do the same when their price irrationally rose during the pandemic. They wanted to do it, but the SEC sent them a letter asking for clarification, and that was enough for Hertz to get the message.
- CPLX 6y ago
  It's not exactly the same. Hertz was actually in bankruptcy, making all equity shares essentially worthless by definition. That's much more problematic than the scenario described here.
  - o-__-o 6y ago
    AMC is a better example, they offered new shares while the price was 3 or 4x of their lows
- kgermino 6y ago
  Not exactly, it's way more interesting than that (to me anyway)... Hertz actually did sell new shares into the price spike. They went to the bankruptcy judge and got permission to sell new shares to help pay off the creditors. Shortly after they started selling the SEC essentially said "lol no" and told them to stop.
sokoloff 6y ago
Buying back shares knowing they're massively overvalued would be destroying shareholder value. Buying them back when you believe they're undervalued creates shareholder value. If that's all true, selling shares when the market is over-valuing them seems like it's creating shareholder value to me. (It's unethical perhaps; perhaps it's illegal. Either of those would be reasons to think it's harming shareholder value, but the sale itself is creating value.)
- mannykannot 6y ago
  > Buying back shares knowing they're massively overvalued would be destroying shareholder value. That is an interesting way of putting it. Sam Palmisano took IBM on a massive buyback program a decade ago, and nothing about IBM since then has refuted your thesis! https://mbiconcepts.com/do-stock-buybacks-work.html https://mbiconcepts.com/do-stock-buybacks-work.html
- pinky1417 6y ago
  You might be interested in reading about Henry Singleton, the Michael Jordan of capital allocation. While running Teledyne, he shrewdly issued shares in exchange for acquisitions when Teledyne's stock was expensive. When shares were cheap and he didn't have other investment opportunities, he smartly bought back stock. Beat the pants off Jack Welch yet fewer people know about him. http://csinvesting.org/wp-content/uploads/2015/05/Dr.-Singleton-and-Teledyne-A-Study-of-an-Excellent-Capital-Allocator.pdf http://csinvesting.org/wp-content/uploads/2015/05/Dr.-Single...
  - sokoloff 6y ago
    Indeed. Outsiders book treatment of this story was great.

jacksonkmarley 6y ago

It seems like the SEC thinks it's (potentially) ok as long as you release all the pertinent information. https://www.sec.gov/corpfin/sample-letter-securities-offerings-during-extreme-price-volatility https://www.sec.gov/corpfin/sample-letter-securities-offerin...

chii 6y ago

Exactly the reason why Hertz did not proceed to do the same when their price irrationally rose during the pandemic. They wanted to do it, but the SEC sent them a letter asking for clarification, and that was enough for Hertz to get the message.

CPLX 6y ago
It's not exactly the same. Hertz was actually in bankruptcy, making all equity shares essentially worthless by definition. That's much more problematic than the scenario described here.
- o-__-o 6y ago
  AMC is a better example, they offered new shares while the price was 3 or 4x of their lows
kgermino 6y ago
Not exactly, it's way more interesting than that (to me anyway)... Hertz actually did sell new shares into the price spike. They went to the bankruptcy judge and got permission to sell new shares to help pay off the creditors. Shortly after they started selling the SEC essentially said "lol no" and told them to stop.

sokoloff 6y ago

Buying back shares knowing they're massively overvalued would be destroying shareholder value. Buying them back when you believe they're undervalued creates shareholder value. If that's all true, selling shares when the market is over-valuing them seems like it's creating shareholder value to me. (It's unethical perhaps; perhaps it's illegal. Either of those would be reasons to think it's harming shareholder value, but the sale itself is creating value.)

mannykannot 6y ago
> Buying back shares knowing they're massively overvalued would be destroying shareholder value. That is an interesting way of putting it. Sam Palmisano took IBM on a massive buyback program a decade ago, and nothing about IBM since then has refuted your thesis! https://mbiconcepts.com/do-stock-buybacks-work.html https://mbiconcepts.com/do-stock-buybacks-work.html
pinky1417 6y ago
You might be interested in reading about Henry Singleton, the Michael Jordan of capital allocation. While running Teledyne, he shrewdly issued shares in exchange for acquisitions when Teledyne's stock was expensive. When shares were cheap and he didn't have other investment opportunities, he smartly bought back stock. Beat the pants off Jack Welch yet fewer people know about him. http://csinvesting.org/wp-content/uploads/2015/05/Dr.-Singleton-and-Teledyne-A-Study-of-an-Excellent-Capital-Allocator.pdf http://csinvesting.org/wp-content/uploads/2015/05/Dr.-Single...
- sokoloff 6y ago
  Indeed. Outsiders book treatment of this story was great.