By James Hamilton, J.D., LL.M.
PIPES, private investment in public equity, have been in the financial news lately. These instruments have been an item of recent SEC staff focus regarding disclosure and also whether the registered resale offering is, in substance, a primary offering by the issuer.
The SEC staff has also been concerned where the securities are convertible into a large number of shares of common stock relative to the issuer's outstanding shares and where there is insufficient disclosure about the market impact and cost of these transactions. In these transactions, recently explained Corporation Finance Director John White, the staff is not worried only about disclosure, but also about the shelf registration system being used in circumstances not intended to be covered by those rules.
The SEC’s disclosure operations staff has undertaken a screening process to identify potential problematic transactions and will be seeking enhanced disclosure where appropriate. The staff's response to these transactions has also drawn attention due to the mistaken view that the staff is reconsidering their approach to PIPE transactions. But the Director emphasized that the staff's view of PIPE transactions has not changed. He added that the staff has simply addressed the recent development where convertible note transactions are structured in an abusive manner.