Buzz Archive:
PIPEs, Small Caps and Rule 415

by Joseph W. Bartlett, Founder of VC Experts.com, 6/26/2007

Consider this all too real scenario: a biotech company resident in the "orphanage" that went public on the basis of promising therapeutics in Phase II trials ... a Wall Street darling, at least for a time. The drug discoveries still look promising but the market landscape has changed. Mid- to small-cap biotechs are now out of favor. Stock trades under $5; delisted from The NASDAQ National Market System; market cap under $75,000,000; cash running short; no analytical coverage anymore (the underwriter's analysts are walled out); and stock trading by appointment, at prices well under management's estimate of fair value.

Options: (1) Go private and then raise capital from the VCs? Given the historical attitude (hostile) of the SEC to going private transactions, frictional costs of up to $1,000,000 are entailed, on top of whatever capital is needed to fund the transaction. (2) An underwritten secondary? Too small for Wall Street. (3) The remaining alternative is a PIPE, and there is trouble on that front as well.

Thus, consider the implications of the SEC staff's response (not yet published but widely circulated) to a no-action request involving the re-sale of securities used in a PIPE if the issuer is one of the 10,000 registrants which are S-3 eligible.