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Re: plastipunk post# 340

Wednesday, 12/20/2006 6:30:50 PM

Wednesday, December 20, 2006 6:30:50 PM

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fyi: Structured PIPE Transactions Take Hold as Convertibles Deemed Risky

To raise money for operations, companies usually must raise it on the open market through privately placed convertible securities that have a floating conversion ratio. These conversions are more often than not priced at some discount to the company's closing bid price over a period of days and have very dilutive effects on the company's stock.

The dangers of this method of financing can be found from the craze of the dot-com bubble, when death spiral or toxic conversions torched stocks like Micro Strategy Inc. (NASDAQ: MSTR), Log On America, eToys, Sedona Corporation (OTCBB: SDNA) and many others that lost up to 90% of their value. With the lessons of the last decade, Allegheny Energy Inc. (NYSE: AYE) and Owens and Minor Inc. (NYSE: OMI) learned that an alternative method could be used much more effectively than death spiral and toxic conversion financing.

As these corporations soon realized that they had another option due to the evolving investment marketplace, they turned to what is called a structured PIPE (private investment in public equity) transaction. PIPE's are any placement of securities for a public company to accredited investors that agree to a purchase agreement in order to purchase those securities. Securities often sold in these types of transactions are common stock, convertible preferred stock, convertible debentures, warrants or other equity securities.

These structured PIPE transactions, without floorless convertibles, are often used as an alternative for other means of financing company operations, such as toxic converts, that are usually very dilutive. Investors in this particular PIPE transaction purchase a specific number of shares at a fixed price, with the closing becoming effective upon the Securities and Exchange Commission's ability to approve the resale registration statement covering the resale of the shares sold in the private placement.

There is one very important benefit to PIPE transactions, including the ability for investors to commit to purchasing a fixed number of securities at a fixed price, avoiding the risks of changes in the market prices or rapidly varying conversion ratios. This fixed price allows considerable protection for the issuing company to limit their risk to the number of shares it has to issue. However, there should always be a concern that PIPE transactions may pose risks or could even be tampered. In the past years of PIPE deals, the SEC has been requesting information from broker-dealers about short sales in connection with particular PIPE transactions. In one highlighted case back in February of 2003, the SEC sued Rhino Advisors for manipulating the price of Sedona Corporation's common stock by selling the stock short for the client that had participated in the floorless PIPE transaction.

Overall, well crafted PIPE transactions that do not use floorless convertible ratios create the incentive of limited risk on market value and shareholder dilution. This has made it a safe bet for many technology and biotechnology companies that have significant capital requirements that need to be fulfilled. However, due to the rise in popularity of PIPE transactions, the variety of companies who complete PIPE offerings has increased dramatically, especially due to the liquidity it provides to the issuer's current shareholders.

In the latest year, it was expected that proceeds generated from PIPE transactions would reach over $14 billion. With hundreds to possibly thousands of PIPE deals in the works, there is no reason to believe the phenomenal movement into private investment in public equity will stop anytime soon.

If you take anything I say as advice, you're crazier than I am.