PIPEs

Bill Sjostrom —  12 June 2007

I recently posted on SSRN one of the two articles I have committed to write for the Entrepreneurial Business Law Journal. It’s entitled PIPEs (note that I went with a “micro-title” and successfully resisted the urge (at least for now) of being “very punny,” e.g., PIPE bomb, Sewer PIPE, Burst PIPE, Smoking PIPE, PIPEline . . . .). You can download the piece here. Below is the abstract:

The Article examines Private Investments in Public Equity (PIPEs), an important source of financing for small public companies. The Article describes common characteristics of PIPE deals, including the types of securities issued and the basic trading strategy employed by hedge funds, the most common investors in small company PIPEs. The Article argues that by investing in a PIPE and promptly selling short the issuer’s common stock, a hedge fund is essentially underwriting a follow-on public offering while legally avoiding many of the regulations applicable to underwriters. This “regulatory arbitrage” makes it possible for hedge funds to secure the advantageous terms responsible for the market-beating returns they have garnered from PIPE investments. Additionally, the article details securities law compliance issues with respect to PIPE transactions and explores recent SEC PIPE-related enforcement actions and regulatory maneuvers. The Article concludes that a more measured and transparent SEC approach to PIPE regulation is in order.

I’m hoping to have a related piece about reverse mergers up on SSRN next month.