WEST PALM BEACH, FL (HedgeCo.Net) – The Securities and Exchange Commission has been looking into the activities of hedge funds in PIPE investments for some time now. PIPE, an acronym that stands forPrivate Investments in Public Equity transactions, have attracted the attention of regulators because of the potential for abuses common with such transactions.
According to published reports, the SEC questioned about 20 US Brokerage companies involved with PIPE transactions recently, and such inquiry has been extended to some hedge fund companies as well. PIPE deals involve a process through which small public companies quickly raise capital by typically giving the purchaser a �bonus� of either warrants or restricted common stock below the market price.
The SEC is looking into the process whereby hedge fund companies short the common stock of firms in which those same hedge funds are also making private investments. Such process causes some type of dilution to stockholders, particularly when extra stocks are sold on discounts, and may also bring about price manipulations as well.
New SEC rules referred to as �Shelf Offerings� [SHO] may be applied to prevent Hedge Funds from selling- short such companies in advance. Some companies use single registration to sell some of their stocks occasionally. Many hedge funds engaging in PIPE deals also invest in shelf offerings as well. The SEC is investigating whether hedge funds improperly use the advance knowledge of companies planning PIPE deals to sell-short the stock of such companies.
SHO provisions will prevent investors in Shelf Offerings, including hedge funds, to sell-short such companies five days in advance prior to the completion of the pricing of such stocks. Eleazer Klein, with Schulte Roth & Zabel a legal adviser on PIPE transactions said, �In most cases, you cannot short in advance of a [PIPE] deal, barring specific facts, my view is you should not be doing it.”
Paul Oranika
Editor-in-Chief
HedgeCo.Net
Email: Editor@hedgeco.net
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