Squeezing the PIPEs

Thu Feb 1, 2007


The SEC has found another way to clamp down, but hedge funds are innovating around it


When the U.S. Securities and Exchange Commission began to delay registration approvals last spring for small issuers of private investments in public equity, or PIPEs, it wasn't just microcap companies that felt the pinch. The move has also hit hedge funds in significant ways.

First of all, hedge funds, which account for nearly 80% of the investors in PIPEs issued by microcap companies, got stuck holding a bag of orphaned - or unregistered - securities. That has sent a chill through the small end of the market, as has the real stunner - the SEC's talk of deeming as underwriters those hedge funds that buy into dilutive PIPE offerings.

Yet true to their design, hedge funds have also engineered ways to profit from the market's disruption - by structuring more deals in tranches to be fully funded when registration becomes effective, and, in some cases, by demanding significant discounts to compensate for...

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