SEC Encourages Non-Toxic PIPEs with Rule 415 Interpretation

The PIPEs Report, in its newest issue out today, has confirmed that the SEC has moved more and more towards allowing a larger percentage of a public issuer’s public float to be registered for public resale following a PIPE, so long as the PIPE does not have so-called “toxic” features.

For those who have been around awhile, you remember the brouhaha back in late 2005 and early 2006 when the SEC suddenly started restricting the percentage that can be registered at one time for resale. They effectively adopted an interpretation permitting up to one-third of the public float (ie non-affiliate shares) to be registered. In registrations following PIPEs done along with a reverse merger, they have been more lenient, understanding that there is typically a very limited float in post-reverse merger companies.

The main “villains” they were going after were those doing PIPEs with toxic features that reset a preferred or convertible debenture’s conversion price when the company’s stock price goes down. This has the perverse effect of incentivizing the investor to want to see the stock go down. But as too often happens with regulators, the baby went out with the bathwater, and players doing deals with no reset provisions and fixed conversion prices were also effected.

With this new interpretation, they have been telling folks that the key element they will look at in determining whether to limit the number of shares being registered is the toxic nature of the investment. This is very good news for those (the vast majority of PIPE players) who moved to fixed price deals, and ends up not changing much for those who continue to use toxic features in their transactions.

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