Shares of debt collector Asset Acceptance (NASDAQ:AACC) plunged as much as 11% yesterday on news that this Motley Fool Hidden Gems Watch List stock has filed to make a secondary offering of its common stock. Since we've suggested that our Hidden Gems members keep an eye on this company, I'd like to take a look at a few of the reasons for its stock's collapse.

Investors almost certainly fear that the offering of 5 million shares, plus an additional 750,000 shares that may be sold as part of an overallotment option, will flood the market and cause Asset Acceptance's share price to plunge. (That was a self-fulfilling prophecy, as it turned out.) Investors were probably also disconcerted to see that all 5.75 million shares -- about 16% of the total share count -- would be sold off by management and other insiders. Thus, not a penny of the proceeds will be going to benefit the company itself. Put the two fears together, and the story seems to read as follows: Insiders are dumping the stock, taking the money for themselves, and trashing the stock price for outside shareholders. Not good.

It doesn't help that Asset Acceptance said the secondary offering is being sought "to boost the float and improve the liquidity of its common stock" -- a suspiciously disingenuous explanation that might have flown if it had been the company issuing new shares or splitting its stock. The explanation doesn't go far in explaining why shareholders would want to sell their stock and take an $8 million bath (to date) on the stock price in the process.

Asset Acceptance might do better for itself, and for preserving the wealth of all its shareholders, if it simply admitted the obvious: It doesn't know for sure why anyone would sell its stock. But the likely explanation is that with insiders currently owning 69% of the company's stock, investors just want to diversify their holdings a bit.

A statement like that one, in addition to having the virtue of being more honest, might even get investors thinking that the sale is a good thing. In general, we love to see small companies managed by people owning a significant stake in the business, but no one likes to play in a rigged game. So long as insiders are the majority owners at Asset Acceptance, outsiders are going to be hesitant to entrust their money to it. For that reason, the drawdown of insider ownership from 69% to 53% can be viewed as a positive development, and that's the story that management should be painting. It's a pity that management chose to spin us instead.

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Fool contributor Rich Smith has no position, short or long, in Asset Acceptance.