The revised edition of our primer clarifies complex aspects of convertible notes, addressing regulatory, accounting, and investment strategy questions for public companies.

Issuing convertible notes has long been an attractive capital-raising option for public companies. At its most basic essence, a convertible note is a debt instrument that pays interest and principal, but also carries the right to exchange the interest and principal cash streams into an equity interest, typically common stock, of the issuer. In that sense, a convertible note can be viewed as a debt instrument combined with a call option (a warrant) on the underlying common stock. However, this basic structure has evolved considerably, particularly within the past 20 years, to incorporate several new and sometimes relatively complex features to address changing regulatory and accounting frameworks and investment strategies.

This primer aims to demystify the underlying financial and accounting principles and the mechanics that have developed to respond to those changing frameworks and strategies.

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