A publicly traded company with a stock price of $12 announces a PIPE transaction to sell 5 million shares at $10.20 per share (a 15% discount) to three hedge funds. One of the hedge funds shorted the company's stock before the PIPE was publicly announced, based on information from the placement agent. What is the primary regulatory concern?

Why B — The hedge fund may have engaged in insider trading by short selling based on material non-public information about the upcoming PIPE transaction

Short selling based on advance knowledge of an upcoming PIPE transaction constitutes insider trading because the PIPE transaction is material non-public information. The SEC has brought numerous enforcement actions against hedge funds and other investors who shorted stocks before PIPE announcements were made public. Additionally, Regulation M Rule 105 prohibits purchasing shares in a public offering after short selling during a restricted period. PIPE investors are typically required to represent that they have not engaged in short selling during a specified period prior to the transaction.