"Existing investors tend to have mixed reactions to PIPE offerings as the PIPE is often highly dilutive and destructive to the existing shareholder base. Depending upon the toxic terms of the transaction, a PIPE may dilute existing shareholders' equity ownership, particularly if the seller has agreed to provide the investors with downside protections against market price declines (a death spiral), which can lead to issuance of more shares to the PIPE investors for no more money.
The SEC has pursued certain PIPE investments (primarily involving hedge-funds) as violating U.S. federal securities laws. The controversy has largely involved hedge funds that use PIPE securities to "cover" shares that the fund "shorted" in anticipation of the PIPE offering. In these instances, the SEC has shown that the fund knew about the upcoming offering (in which it would be involved) prior to shorting shares." http://en.wikipedia.org/wiki/Private_investment_in_public_equity
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