Gypsy Swap – Definition

Cite this article as:"Gypsy Swap – Definition," in The Business Professor, updated September 20, 2019, last accessed October 27, 2020,


Gypsy Swap Definition

A gypsy swap is a procedure of raising capital whereby the two parties involved in the swap exchange restricted equity shares in return for freely exchangeable shares (or, unrestricted securities), thus increasing the dividend payout for both parties. A gypsy swap essentially eliminates the need for issuing additional debt or holding a secondary public offering. Also, a gypsy swap is instantly dilutive, since it does not result in the lapse of the restricted party’s equity claim. A gypsy swap usually takes place when an investor wishes to liquidate his position in a publicly-traded company. Such a scenario normally arises when the investor holding a restricted stock wishes to exchange it for a more liquid investment, since restricted stocks can only be sold under certain circumstances.

A Little More on What is a Gypsy Swap

A gypsy swap typically involves the performance of multiple transactions that are made with the intent of increasing capital for the business. There are two types of future cash flows or legs involved in such a swap — common stock and restricted stock. The business that is looking forward to a gypsy swap begins the process by convincing existing shareholders to trade in common shares for restricted shares. The common shares, thus acquired, can be sold to  new investors at higher prices, thus increasing capital. On the other hand, the restricted shares are generally offered to executives and are non transferable in nature. However, gypsy swaps are relatively rare occurrences and are only used by companies as a last resort for avoiding cash constraints or bank covenants. Moreover, such swaps usually result in businesses doling out special packages to both new and old investors in order to convince them to be a party to the swap. Because of these reasons, companies usually opt for comparatively easier and more conventional options such as raising debt and equity.

Gypsy swaps are usually monitored by government agencies to ensure that they do not circumvent regulations. For example, in the United States, the Securities and Exchange Commission (SEC) has laid down certain provisions in Section 5 of the Securities Act of 1933 that make it mandatory for any new sales of stock to either be registered with the SEC or obtain a waiver. Consequently, gypsy swaps run the risk of being considered as violations of Section 5 by the SEC, and the shares received by the new investor are restricted securities under Rule 144(a)(3). In this regard, the legal case of Zacharias v. SEC deserves special mention — the Circuit Court of D.C. agreed with the SEC that the new investor as well as the original shareholder could be considered “underwriters”, and thus, participants in the transaction. Accordingly, the Court upheld the disgorgement penalty of 100% levied on the proceeds of the sale as “appropriate”. From the perspective of a trader, it is important to keep an eye out for the obvious red flags when participating in a gypsy swap.

However, with the right discerning skills, an experienced trader may be able to use a gypsy swap as an invaluable tool to exchange one type of asset for another within the same company. In the right hands, a gypsy swap can prove to be a much more convenient method of investing on a new asset without having to go through the trouble of selling one security and then purchasing the other. Additionally, gypsy swaps also tend to be relatively more cost-efficient in that they only require the payment of tax fees and nothing else. In an ideal situation, a gypsy swap is intended to be beneficial to both the issuing company as well as the new buyers — while the former stands to make capital gains, the latter gains equity within the company that sold their securities.

The Mechanism of a Gypsy Swap

Any gypsy swap typically involves two principal transactions —

  • The “swap” of common stock and restricted shares: This transaction involves the company offering restricted shares to a select group of its shareholders in exchange for common stock. This process requires a fair bit of persuasion and reassurance since not everyone will be willing to let go of common stock in lieu of restricted shares.  However, once the transaction goes through, the issuing company will end up with common shares in its treasury. As for the shareholders, such a transaction does not usually result in either a profit or a loss — however, there may be some tax consequences contingent on the circumstances.
  • The sale of the common stock: This transaction involves the sale of the newly acquired common stock by the company to new investors in lieu of cash. It should be noted here that the price at which the common stock changes hands may either be higher or lower than the current market prices of the shares. Nevertheless, at the end of this transaction, the company has at its disposal new cash reserves, while the new investors gain equity in the business.

References for “Gypsy Swap” › Concepts › Finance and Economics

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