The Securities and Exchange Commission (SEC) has filed charges against a number of traders and hedge funds involved in Private Investment in Public Equity (PIPE) offerings since 2005, alleging violations of both stock registration and insider trading rules, as well as fraud. The registration issue recently was considered by a federal judge for the first time.
In that case, SEC v. Mangan, the judge rejected the SEC’s position regarding the scope of the registration rules as applied to PIPEs, and thereby put a key legal underpinning of the SEC’s PIPE enforcement strategy in doubt. 1 The second issue, insider trading, turns on the nature of a trader’s interactions with an issuer’s placement agent and whether they give rise to a duty to refrain from trading on nonpublic information. Because such interactions in PIPE offerings commonly are not formally documented, the nature of the relationship between issuers and investors can be difficult to discern, presenting substantial questions as to whether an investor has a duty to refrain from trading on information concerning impending PIPE transactions.
