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...