Replies to post #44344 on DD Support Board and Research Team

[janice shell]

Thanks for the link. I see I was only half right. This is interesting, and important:

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).

And it is a great hedge for PIPE holders. They could open that short position the day they take delivery of their stock, and it seems they can hold it open as long as they like. They could cover anywhere along the way, or wait till their restricted stock is freed up.

But they might even be able to make a tidy profit. Say they bought their stock at a 50% discount to market. They'll be way ahead on that short from the moment they open it. If the stock were then to fall another 85% or so, they'd really clean up...