whenever I hear the word pipes, I think of that awesome scene in pulp fiction where the big dude says to zed “you hear me boy, Im gonna call some pipe hitting ***** … and get medival on that ***” anyways, here is my question. PIPEs are covered on the CAIA exam but the material is pretty nebulous… DO YOU KNOW IF THE SAME INVESTORS THAT PARTAKE IN A PIPE (IE RECEIVE PREFERRED OR CONVERTIBLE STOCK AND HELP A CO RAISE $) CAN, AT THE SAME TIME, SHORT THE STOCK THEY ARE PIPED UP IN??? Because it would seem to me to be a great way to cash in hard and then take over the company. Toxic PIPES, also called death spiral, occur when a company issues a PIPE. if the PIPE is toxic (structured PIPE), the investor gets more and more common equity if the stock price falls. so assuming the stock falls b/c either the market didnt like the idea of the company doing a PIPE to begin with (or it is being shorted hard anyways by other parties), the investor would be able to short the stock, lock in gains, and then when the stock is really depressed, convert the PIPE shares to common, and have majority ownership. they essentially take over the firm. Am i thinking right? (and yes, PULP FICTION is in my top 10 best movies of all time)
It’s called “shorting into the PIPE” and it’s done all the time and it’s an evolving and tough area of the law. The SEC has pursued several anti-fraud cases over the last few years about it, and to the best of my knowledge, lost them all. The SEC contends that by shorting into the PIPE prior to registration you are effectively publicly selling unregistered securities (because you plan to cover after registration). Of course, that would be illegal. AFAIK, they still claim that and they still keep losing that. As far as taking over the firm - that doesn’t happen by shorting into the PIPE because you have to cover the the short with the PIPE shares. If you own enough PIPE shares but manipulate the market price by shorting so that you can cnvert PIPE shares and take over the company, you are going to be whacked big by the SEC for price manipulation and the PIPEs are just going to be motive and opportunity. If you short into a PIPE, you may or may not be doing an illegal thing. You should keep quiet about it because you don’t want the legal hassle. I can assure you that CFAI’s PCP committee is not within 100 miles close to being able to understand that you can have an intellectual debate in court with the SEC and not have violated CFAI’s ethical principles. Edit: BTW - I love that movie so much that my wife hates it.
^ yes what he said. you can’t short the common legally until the deal is announced publicly/registration has happened. once it has, you can short the common. however, under the ever evolving US laws, you can’t flatten out the short with the PIPE shrs you receive. so you eventually have to close out both sides of the trade, but you more or less are locking in the profit if you can get the shares located to short. this market used to be the easiest $$ in wall street, was huge maybe 5 yrs ago. SEC has clamped down a ton, as JDV said, a lot of court cases with mkt manipulation, trading ahead of deals, etc, shutting down a lot of HF’s. International rules on PIPES in a lot of countries are where the US was 5-10 yrs ago, a lot of these players moving to Canada, etc, to do deals now. HF’s in this space aren’t really “investing” in the co’s like PE firms do. They’re doing it for the wrong reasons imo. The HF’s like JDV said aren’t looking to take over the firm. They want to go long cheap stock, short the stock in the mkt (essentially locking in $$) and then flatten to get out. Rules are evolving to make this harder to do and a lot of the big players in the space in terms of # of deals in the last few yrs have closed up shop.
thanks guys. its good to work with real pros on this board.
daj224 Wrote: ------------------------------------------------------- > whenever I hear the word pipes, I think of that > awesome scene in pulp fiction where the big dude > says to zed “you hear me boy, Im gonna call some > pipe hitting ***** … and get medival on that > ***” > > anyways, here is my question. PIPEs are covered on > the CAIA exam but the material is pretty > nebulous… > > DO YOU KNOW IF THE SAME INVESTORS THAT PARTAKE IN > A PIPE (IE RECEIVE PREFERRED OR CONVERTIBLE STOCK > AND HELP A CO RAISE $) CAN, AT THE SAME TIME, > SHORT THE STOCK THEY ARE PIPED UP IN??? > > Because it would seem to me to be a great way to > cash in hard and then take over the company. Toxic > PIPES, also called death spiral, occur when a > company issues a PIPE. if the PIPE is toxic > (structured PIPE), the investor gets more and more > common equity if the stock price falls. so > assuming the stock falls b/c either the market > didnt like the idea of the company doing a PIPE to > begin with (or it is being shorted hard anyways by > other parties), the investor would be able to > short the stock, lock in gains, and then when the > stock is really depressed, convert the PIPE shares > to common, and have majority ownership. they > essentially take over the firm. > > Am i thinking right? > > (and yes, PULP FICTION is in my top 10 best movies > of all time) i laughed when i read piped up. man i need to grow up.