David Feldman's book, Reverse Mergers: Taking a Company
Public Without an IPO, now in its third printing, was published in 2006
by Bloomberg Press (available on http://www.amazon.com).
View David Feldman's reverse merger blog at www.reversemergerblog.com.
Joseph Smith and David Feldman are coauthors of PIPES:
Revised and Updated Edition - A Guide to Private Investments in Public Equity
(Bloomberg Press, 2005) available on http://www.amazon.com.
In the News
David
Feldman quoted in Wall Street Journal
article on December 29, 2006 about PIPE
deals.
SEC
Slows Flow of PIPE Deals to a Trickle
by
Judith Burns
Washington
-- PIPES ARE GETTING clogged in the
nation's capital.
Staffers at the Securities and Exchange
Commission are increasingly reluctant
to sign off on transactions involving
"private investments in public equity,"
or PIPEs, a popular way for public companies
to raise cash quickly. The reason: the
deals are getting so big and complex
that it is causing concern that shareholders
aren't aware of the potential risks.
Offerings like these have boomed because
they let companies quickly access cash
from sophisticated investors, such as
hedge funds. This year, a record $27.7
billion of PIPE deals were placed through
Dec. 22, according to PlacementTracker,
up about 38% from 2005. Buyers in these
private transactions receive unregistered
securities (typically stock, or debt
that can be converted into stock) with
the expectation that the issuing company
will later obtain SEC approval to register
them -- allowing the securities to be
resold to the public. In recent months,
however, the SEC has blocked scores
of companies from registering shares
sold in PIPE deals.
Proponents of PIPEs concede that abuses
-- including SEC allegations of insider
trading by some hedge funds that invested
in PIPE deals -- have tarnished the
sector. Issuing a large number of shares
through a private offering can also
flood the market, diluting the value
of shares held by stockholders and hurting
the stock price.
Of particular concern to the SEC are
frequent users of PIPE transactions,
and large PIPE offerings by smaller
companies. In the wake of the SEC crackdown,
the number of deals has declined, particularly
since midyear, according to Sagient
Research Systems Inc., whose PlacementTracker
monitors PIPEs.
Supporters of PIPEs worry the crackdown
will close off funding for small companies.
Indeed, it can be tough for tiny companies
to raise money through bank loans or
traditional financing from Wall Street
firms -- either they are too small and
unproven, or already heavily in debt.
PIPEs, by contrast, let companies tap
financing by going straight to investors
with minimal regulatory fuss.
"There is no alternative for these
companies; the only way they can finance
themselves is through PIPEs," says David
Feldman, a managing partner at New York
law firm Feldman Weinstein & Smith
LLP.
In the past, regulators would let companies
register large numbers of shares issued
in PIPE deals -- equal to many times
the value of the company's current shares
outstanding. Now, securities lawyers
say the agency's staff is less tolerant,
and frowns on attempts to register shares
that amount to more than 33% of the
"public float," or the number of shares
held by investors not affiliated with
the company.
