Death spiral financing is the small-cap trader's worst trap: a convertible note or preferred with a conversion price tied to a discount of the recent trading price. As the lender converts and dumps, the price drops, the next conversion prints more shares at a lower price, and the cycle repeats until the float is unrecognizable. This guide shows exactly where in an SEC filing to find the terms — and which lender names should trigger an instant risk review.
Stocks Leak flags these lenders automatically on every filing. But knowing what the filing actually says gives you an edge when the alert fires.
What makes a convert 'toxic'
A convertible is toxic when the conversion price floats with the market instead of being fixed. Common structures: 'lower of $X or 90% of the lowest VWAP over the prior 5, 10, or 20 trading days', or a straight discount to the current bid.
The math is unforgiving. If the note converts at 85% of the 5-day low VWAP and the lender sells into every conversion, each round of selling lowers the reference price for the next conversion. A $2M note against a $10M market cap can print 5–10× the original share estimate before it's exhausted.
Pre-funded warrants and Series A/B preferreds with variable-rate resets follow the same playbook — read the certificate of designations, not just the press release.
Where the terms live in each filing
424B5 (prospectus supplement): the offering terms in plain English. Search for 'variable rate', 'alternate conversion price', 'reset', 'floor price', 'VWAP', and 'anti-dilution adjustment'. A floor of $0.10 on a $0.50 stock is not protection — it's a warning that management already expects the price to get cut in half.
S-1 / S-3 (registration statement): the shares being registered for resale. If you see 200% or 300% of the underlying converted shares being registered, the lender is expecting the price to drop and needs cushion for extra conversions.
8-K exhibits: the actual securities purchase agreement, note, and warrant. Exhibit 10.x or 4.x is where the reset formula lives verbatim. The press release will say 'strategic financing'; the exhibit will say 'the lower of $0.50 or 85% of the two lowest VWAPs during the ten trading days prior to conversion'.
Certificate of Designations (for preferred stock): filed as an 8-K exhibit. Look for 'Alternate Conversion Price', 'Triggering Event', and 'Adjustment Price'. Triggering events reset the conversion price on missed filings, going-concern language, or reverse splits.
Toxic lender names to flag on sight
The same shops recycle through hundreds of tickers a year. Seeing any of these in a 424B5, 13G, or Selling Stockholder table is a signal to check the conversion terms immediately, not a guarantee the deal is toxic:
Lincoln Park Capital, Hudson Bay Capital, Alpha Capital Anstalt, Anson Funds, Sabby Management, Ionic Ventures, Armistice Capital, YA II PN (Yorkville), 3i LP, Bigger Capital, District 2 Capital, Empery Asset Management, Iroquois Capital, L1 Capital Global, and Boothbay Absolute Return.
Not every deal these funds do is destructive — Lincoln Park's equity lines of credit are often structured as fixed-price commitments with volume caps that are relatively benign. But when their name appears next to 'convertible' or 'variable rate', treat it as a red flag until you've read the note.
Fast checklist before you take the trade
1. Is the conversion price fixed, or tied to VWAP / market price? Variable = toxic risk.
2. How many shares are registered for resale relative to the current float? >50% is a red flag; >100% is a full-on reset warning.
3. Is there a floor price? A floor at 20% of the current price is not protection.
4. Are there anti-dilution ratchets? Full ratchet means one bad reset propagates to every prior investor.
5. What's the baby-shelf (IB6) capacity? Sub-$75M float companies are capped at ⅓ of float per year — if they've already used it, the next raise has to be even more punitive to clear.
6. Does the deal have registration rights within 30 days? Fast registration means the lender plans to sell fast.
How Stocks Leak catches these in real time
Every 424B5, S-1, S-3, and 8-K is parsed the moment it hits EDGAR. The dilution tracker flags variable-rate language, extracts named lenders, and cross-references them against a maintained toxic-lender list — so you see 'HUDSON BAY — VARIABLE RATE — 3.2M SHARES REGISTERED' on the ticker page instead of scrolling through 200 pages of PDF at 4pm.
Set a watchlist alert on any small-cap you're holding overnight. Death spirals almost always price after hours or pre-market; catching the 424B5 in the first minute is the difference between exiting near the previous close and eating a 40% gap.