Legal and Ethical Aspects of Death Spiral Financing

“Death Spiral Financing” refers to a certain type of
Private Investment in Public Equity (PIPE), generally
used by companies in financial trouble. I will show
how these “toxic” PIPEs usually lead to the devaluation
and even destruction of companies. While not
illegal, these transactions take advantage of loopholes
within the SEC regulations regarding disclosure
of securities purchases. I will present how the
SEC has raised claims (mainly unsuccessfully) against
such practices in at least one of two categories: sale
of an unregistered security, or insider trading. I will
conclude by arguing that such transactions need to
be more carefully scrutinized in order to protect and
better inform the “unsuspecting public”.