PIPEs, Shorts, and Death Spirals

By: Robert Grosshandler | January 29, 2020

A PIPE is a Private Investment in Public Equity. In and of itself, it’s not a “bad thing”. But all too often, the companies that raise money this way are small companies that have gotten themselves into financial trouble, really, REALLY need to raise money, and have no negotiating leverage.

What can happen is that they agree to investment terms that protect the investor in case the price of their stock goes down. And that gives the investor motivation to drive the price of the stock down. The lower the stock price, the more the investor will own. The lower the stock price, the harder it is to raise money. The harder it is to raise money, the less likely it is that the company will succeed. And that will drive the price of the stock even lower.

There are investors who make money by selling short. They sell high and then buy low. Most of us like to buy low and sell high. It’s a risky strategy, but it can work. Especially if you’re able to drive the price of the stock down.

If there’s a lot of that, you get: A downward spiral. Possibly even a DEATH SPIRAL. Down the drain.

So What?

Why am I writing about this? Mostly, we needed a fun topic for this week’s education newsletter. (And writing about PIPES and death spirals gives us a catchy subject line for the newsletter.)

While it is certainly possible we could agree to a really dangerous deal in order to attract investors, there are certain things about iConsumer that make that less likely.

The biggest hurdle for a wannabe short-seller is that we’re really, really tiny still. Most of the time, that’s not a good thing. But it helps to put a natural limit on selling short. One of the necessary steps to selling short involves borrowing the stock. If there isn’t a lot of stock in the stock market (one of iConsumer’s challenges) the short seller can’t borrow the stock. So they can’t easily sell short.

Another potentially limiting factor is also size related. Because we’re tiny, our stock price is highly volatile. Just the smallest bit of good news could cause our stock price to skyrocket. If the short seller can’t buy the stock at a price lower than he or she sold at, the short seller is going to lose money. And there is no limit on the amount of money the short seller might lose. That’s unlimited downside. That’s scary.

To summarize: there are lots of things that keep me up at night concerning iConsumer. But PIPES and short selling aren’t currently on that list. Indeed, I want us to be big enough that I DO have to worry about short sellers.

If you’re really interested in short selling, take a look at Tesla. There is an amazing amount of short selling associated with that company.