SEC enforcement in the PIPE market: Actions and consequences

Abstract

In 2002, the SEC launched enforcement actions against investors involved in PIPE (Private Investments in Public Equity) transactions. We describe the legal ramifications of this enforcement initiative, and document dramatic contemporaneous market-wide changes in the contractual structure of PIPEs. PIPEs in the post-action period included fewer aggressive repricing rights and more trading restrictions. However, PIPEs in the post-action period also included more investor protections and fewer issuer rights. These results suggest that the SEC’s enforcement enticed investors to substitute non-SEC-targeted contractual features for targeted ones. Our paper sheds new light on the role of legal enforcement on financial contract design.