Attorney Laura Anthony Talks Form 8-K and Pipe Transactions - YouTube

I'm attorney Laura Anthony founding partner of Legal & Compliance, a full service corporate,

securities, and business transactions law firm.

Today is the continuation in a LawCast series talking about Form 8-K. On September 26, 2016,

and again on the 27th, the SEC brought enforcement actions against issuers for the failure to

file Form 8-K’s associated with corporate finance transactions and in particular PIPE

transactions involving the issuance of convertible debt, preferred equity, warrants and similar

instruments.

During a conversion process, the number of issued and outstanding shares of common stock

can increase dramatically, causing dilution to existing shareholders and a decrease in

stock price from large selling pressure.

In an action against Connexus Corporation, the SEC noted that the unreported issuances

of securities increased the amount of total outstanding common stock by more than 600%

from the last reported number.

The ability of an investor in a PIPE transaction to convert and trade responsibly makes the

difference between a successful financing relationship with the investment community

and one that can cause long-term damage to a company.

To be clear, I do not think that there is anything inherently wrong, illegal or improper

with these corporate finance transactions.

The exact same structure is used for PIPE investments in companies big and small, whether

traded on the OTC Markets, NASDAQ or the NYSE.

However, smaller companies, especially those on the OTC Markets.

often do not have the volume and liquidity to bear the effect of sudden enormous selling

pressure.

Larger companies are not immune to issues, though.

Nuanced provisions negotiated in these convertible derivative instruments can be problematic

as well, such as the recent use of the Black-Scholes put option in warrants.

Vapor Corp. provides the prime case study example of what can happen when the financing

provisions are not fully understood and vetted by the parties.

Vapor Corp. lost its listing on an exchange as a result of such a PIPE transaction.

When considering a PIPE transaction, companies are often presented with numerous term sheets

and investors to choose from.

The terms will only vary slightly and many investors will match terms from a competitor.

In choosing a transaction it is incumbent upon the company to conduct due diligence

on the investor, including their reputation in the industry and trading history associated

with other investments and conversions.

I am securities attorney Laura Anthony, founding partner of Legal & Compliance, and producer

of LawCast.

Should you have any questions about today’s topic, please visit SecuritiesLawBlog.com

and LawCast.com, or contact me directly.

Inquiries of a technical nature are always encouraged.