William K. Sjostrom Jr.
University of Arizona - James E. Rogers College of Law
Entrepreneurial Business Law Journal, Vol. 2, p. 381, 2007
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.
Number of Pages in PDF File: 33
Keywords: PIPE, private investment, public equity
JEL Classification: G30, K22, M13Accepted Paper Series
Date posted: June 11, 2007 ; Last revised: November 27, 2007
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