Convertible notes for listed issuers

A convertible note issued by a listed company is short-dated debt that converts into quoted shares, usually at a price referenced to the market. It is not the seed-stage convertible note or the SAFE that dominates startup search results: there is an observable share price, an exchange rulebook, a transfer agent and a resale path, and every one of those changes the terms.

Key takeaways

• The reference price already exists. A startup note prices off a future round; a listed issuer's note prices off the tape. The negotiation is about which window, which measure, and what happens if the price falls.
• The floor bounds the dilution, not the discount. A market-referenced conversion price with no floor has no calculable maximum share count.
• Exchange capacity is checked before price. Nasdaq Listing Rule 5635(d) requires shareholder approval for a 20% Issuance below the Minimum Price; NYSE American applies a comparable test under Section 713.
• Conversion shares start life restricted. They become freely tradable on effectiveness of a resale registration statement, or after the Rule 144 holding period where Rule 144 is available. Shell companies must clear Rule 144(i) first.

Why a listed issuer's convertible note is a different instrument

Search results for convertible notes are dominated by seed-stage material. A startup note exists to defer a valuation: it converts into whatever the next priced round agrees, and if no round happens the parties argue about maturity. None of that applies to a company whose shares carry a price every trading day.

That single fact reshapes every term. Your investor realises the position by converting and selling into your own order book, so the terms that matter govern how many shares they receive and when they may sell. Read the term sheet in that order.

Conversion pricing, floors and caps

A fixed conversion price is simple: the investor holds a call struck at that level, and if the shares fall the note behaves like debt and has to be repaid. A market-referenced price does the opposite, delivering more shares as the price falls. Neither is inherently predatory; what matters is whether the mechanic is bounded.

Three terms bound it. A floor price sets the lowest conversion price the formula can produce, which makes the maximum share count calculable. A conversion cap limits how much principal may convert in a period. The lookback window decides how far one bad session moves the price. Size the facility against average daily traded value, not the funding gap; the arithmetic is on dilution and conversion mechanics.

Exchange capacity and the ownership blocker

On Nasdaq, a private issuance of shares or convertible securities equal to 20% or more of the shares or voting power outstanding, priced below the Minimum Price, needs shareholder approval under Listing Rule 5635(d): Minimum Price is the lower of the closing price immediately preceding signing and the average closing price over the 5 trading days before it. Nasdaq's interpretive material on Future Priced Securities addresses this instrument directly, because a varying conversion price makes the share count indeterminable at signing. That is why a floor at or above the Minimum Price is the usual way to stay inside the rule. Section 713 of the NYSE American Company Guide applies a comparable test. The rule is set out on this site under the Nasdaq 20% rule.

The ownership blocker does a different job. A holder crossing 5% of a registered class files a Schedule 13D or 13G, on a deadline the SEC's 2023 beneficial ownership amendments shortened to 5 business days; above 10%, Section 16 reporting and short-swing profit recovery bite. A blocker of 4.99% or 9.99% caps deliverable shares below those thresholds.

Registration, resale and the investor's exit

Shares issued on conversion of an unregistered note are restricted securities, and two routes take them to market: a resale registration statement, which makes them saleable once declared effective (see resale registration statement), or Rule 144, once the holding period has run and the other conditions are met.

Rule 144 permits that holding period to be tacked back to the date the note was acquired where the shares are received solely in exchange for the note, so a cashless conversion feature is not cosmetic. The exception that catches this market is Rule 144(i): the rule is not available for a current or former shell company unless its conditions are satisfied. If you came to market through a reverse merger, read Rule 144 and shell companies and check the Rule 144 holding period.

What separates a workable note from a predatory one

The instrument is neutral; the structure is not. These terms decide which you are being offered.

If a convertible is the wrong answer for your balance sheet, the convertible debt decision and equity facilities set out the alternatives. To talk through a situation, tell us about the listing and the raise.

Related reading

• All instruments compared
• Registered direct offering
• Standby equity purchase agreement
• Who we fund

Primary sources

• eCFR — 17 CFR 230.144, Rule 144 (tacking under 144(d)(3); shells under 144(i))
• SEC — Revisions to Rules 144 and 145
• Nasdaq Listing Rules — 5635 and IM-5635-4, Future Priced Securities
• NYSE American Company Guide — Section 713
• SEC — Modernization of Beneficial Ownership Reporting (2023)

Convertible notes: frequently asked questions

How is a convertible note for a listed company different from a startup convertible note?

The reference price already exists. A seed-stage note or a SAFE converts against a future priced round that may never happen. A listed issuer's note converts into a quoted security, so the price is referenced to the tape and the investor exits through a registration statement or Rule 144.

What does a market-referenced conversion price mean?

It means the conversion price is calculated from the market rather than fixed at signing, commonly a percentage of the volume-weighted average price over a defined window. The mechanic shifts price risk onto existing shareholders, so the floor and the pace of conversion matter more than the headline discount.

Why do convertible notes carry a 4.99% or 9.99% ownership blocker?

To keep the holder below the thresholds that turn a financing counterparty into a reporting holder or an insider. A holder crossing 5% of a registered class must file a Schedule 13D or 13G, and above 10% Section 16 applies. The blocker caps shares deliverable on any conversion.

When do shares issued on conversion become freely tradable?

Either a resale registration statement covering them is declared effective, or Rule 144 is available and its holding period has run. Rule 144 generally allows that period to be tacked back to the date the note was acquired where the conversion is cashless. Shell companies must clear Rule 144(i) first.

Does a convertible note need shareholder approval?

That is decided by the listing venue, not by the note. On Nasdaq, Listing Rule 5635(d) requires shareholder approval before a 20% Issuance priced below the Minimum Price, and a variable conversion price is treated as capable of producing an indeterminate number of shares. Market practice is to set a floor.