In a PIPEs transaction equity securities are privately sold but registered before or shortly after closing

• Typically used by issuers that need equity capital quickly or when public markets are closed to the issuer

• Stock is sold at a discount to market

• Can be structured using common stock,
  convertible securities or warrants
• Conversion price for convertible securities is usually fixed, but can be tied to a formula based on market price at time of conversion or use an anti-dilution provision
  ◊ Sometimes abused by investors that short the issuer's stock ("death spiral" or "toxic" preferreds)

Equity line financings are an alternative to PIPEs

• Where issuer has right to put registered securities
  to a buyer for a contractually agreed period of time

• Typically at an agreed discount to market at time of put

• Assures issuer access to equity when and as needed

CFO Article 2004

SEC staff comments on equity line financings

• Reasons for having equity line
• Dilution issues, including for maximum takedown
• Relative size of offering
• Compensation paid to investor or others
• Whether the investor is an affiliate
• Whether the investor is receiving any compensation

• From 2005 PLI Securities Law Institute

Hedge fund manager charged with insider trading 2005

• Shorted the stock of companies in which she had confidential information about their PIPEs offerings
• SEC press release
• Litigation release

SG Cowen executive charged with insider trading 2005

• Shorted the stock of companies prior to closing of PIPEs in which SG Cowen invested
• SEC press release
• Litigation release

PIPEs must be structured to comply with several rules, including:

• Regulation D
• Beneficial Ownership Reporting (Schedule 13D)
• Hart-Scott-Rodino filings

• Non-binding, confidential letter of intent can be used to start the HSR Act statutory waiting period

• Rule 135c

• Notice of proposed unregistered offerings
• SEC Release 33-7053 1994

• SEC FAQs

• Current Issues 2001
• Telephone Manual 1999

NYSE / Nasdaq Rules

• Can require shareholder approval
• See SRO: Shareholder Approval Requirements

Biotech PIPEs - Equity Line precedent

Productivity Technologies Equity Line 2004

Rite Aid  PIPEs 2001

Short Sales