Capital Structure and Corporate Financing Decisions: Theory, Evidence, and Practice

P1: TIX/XYZ P2: ABC

JWBT436-c23 JWBT436-Baker March 4, 2011 7:57 Printer Name: Hamilton

416 Special Topics

SUMMARY AND CONCLUSIONS

Companies of all sizes use PIPE financing. For larger companies, PIPE deals offer

quick and confidential access to equity financing and attract the interest of long-

term investors, such as mutual funds and pension funds. For smaller companies,

PIPE deals are a financing option of last resort and mainly attract hedge funds

looking to make short-term profits. By legally skirting various regulations, hedge

funds can earn market-beating returns through PIPE investing.

PIPE deals raise numerous securities regulation issues, but all of them are

manageable. Because hedge funds regularly push the legal envelope, the SEC has

brought several enforcement actions against them in recent years, with mixed

success.

In conclusion, PIPE deals demonstrate the dynamism of our capital markets.

They have filled a financing gap for small public companies while adding another

financing option for larger public companies.

DISCUSSION QUESTIONS

1. What benefits does a PIPE offering provide an issuer over a traditional private

placement?

2. At whose expense are hedge funds profiting through PIPE deals?

3. Why do PIPE shares sell at a discount?

4. Why does an issuer’s stock price typically drop following the announcement of

a PIPE financing?

REFERENCES

Brophy, David J., Paige P. Ouimet, and Clemens Sialm. 2009. “Hedge Funds as Investors of

Last Resort.” Review of Financial Studies 22:2, 541–574.

Chaplinsky,