Many PIPE investors "hedge" their investment by selling short the PIPE issuer’s securities before the resale registration statement is declared effective. There is nothing per se illegal about "hedging" a PIPE investment by selling short the issuer’s securities. Such short sales do not violate the registration provisions of the Securities Act if, among other things, the investor closes out the short position with shares purchased in the open market. An investor violates Section 5 of the Securities Act, however, when it covers its pre-effective date short position with the actual shares received in the PIPE. This is because shares used to cover a short sale are deemed to have been sold when the short sale was made (i.e., the PIPE shares were not effective at the time of the sale).
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