July Study Question of the Month

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Question

 

 

 

 

 

 

A publicly traded company solicits private investors through a PIPE transaction. After the shares are sold, the company does not register them with the SEC. Which of the following negative consequences is it most likely to face?
 
  1. Disciplinary action by the SEC
  2. Disciplinary action by FINRA
  3. Damages paid to the holders of the privately placed shares
  4. Conversion of the privately placed shares to regular shares at a conversion ratio unfavorable to the company

Answer: C. Because a PIPE transaction is a private placement, the SEC does not require the company to register the shares. It is standard for the company to register the shares anyway, to remove their status as restricted securities. The company typically will have agreed to pay damages to the holders of the privately placed shares if this is not done within a reasonable time, usually 1% to 1.5% per month.

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