3L Douglas Hoffer has a new paper on SSRN describing and defending “PIPE financing” — a form of corporate financing that has taken off in the past fifteen years.  PIPE financing permits corporations to raise money by selling equity through a two-step process that diminishes the regulatory burdens normally associated with public offerings. 

PIPE deals have drawn negative comments from other scholars and the SEC, but Douglas thinks the critics have failed to appreciate the important benefits of PIPE financing. His paper, entitled “Quagmire: Is the SEC Stuck in a Misguided War Against PIPE Financing?,” will be published in Transactions: The Tennessee Journal of Business Law.  The abstract appears after the jump.  

A popular non-traditional capital formation option is the “PIPE” deal: Private Investment in Public Equity. Over the last ten years, companies raised more than $100 billion using PIPE transactions. The Securities and Exchange Commission (“SEC”) has increased its regulatory oversight of PIPE transactions as they have become more popular. The SEC believes that some PIPE investors who take a short position in a PIPE issuer’s publicly traded shares violate Section 5 of the Securities Act by selling unregistered securities, and that PIPE investors who trade on knowledge of an impending PIPE transaction are guilty of insider trading. The purpose of this article is to demonstrate that the SEC’s aggressive enforcement against PIPE deals is misguided both because it is based on flawed interpretations of the law and because it ignores the benefits of PIPE financing. Although most of the existing scholarship on PIPE financing shares the SEC’s negative views, these articles have ignored the benefits and exaggerated the risks associated with PIPE financing. This article makes the case for PIPE financing by fully considering its benefits and risks.