Excerpt from the Growth Company Guide 4.0
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PIPE (Private Investment in Public Equity) refers to a method public companies use to raise capital, often when the public offering market is unreceptive and other easier or more attractive fundraising avenues are unavailable. A PIPE involves the sale of the public company’s unregistered securities, frequently common stock or a convertible debt or equity security, to a limited number of accredited investors pursuant to a private placement exemption. The company typically agrees, as part of the sale, to register the privately sold shares for resale in the public markets after a brief period of time. After the sale, the company registers the shares with the SEC, enabling the investors to sell the shares into the public market.

The security can be sold in the PIPE at a fixed price or at a price that floats based on the public price of the company’s securities. The price charged to the PIPE investor is typically discounted when compared to shares freely traded in the company’s public market. This is because the shares are not freely tradable at the time of their purchase and are, therefore, less valuable.  Sometimes, the PIPE investor also receives warrants to purchase company stock in the future as part of the transaction.

Qualified investment bankers frequently assist in structuring and completing PIPEs. Company securities counsel are routinely involved in structuring and documenting the transaction and the security registration that follows.

PIPEs typically unfold in the following manner. Company management reviews the possibility of conducting a PIPE with their counsel and interviews one or more qualified investment bankers to assist and act as the placement agent in the private placement. The agent solicits interest from a select and limited group of accredited investors. These investors may be institutions or wealthy individuals. The solicitation may or may not include the use of a traditional private placement memorandum.

The company then negotiates and completes a stock purchase and registration rights agreement with the interested investors. Once the sale is complete, the company announces the sale to the public and begins preparation of the documents needed to register the investors’ stock for resale into the public market.  The company later files the registration statement and the PIPE investors are free to sell their shares into the public market. This registration occurs only after the sale of the PIPE is complete so that the private offering is not integrated into the later public offering.

The principal disadvantage of a PIPE when compared to a public offering of company securities is the price obtained for the securities, which are routinely sold to the PIPE investor at a discount to reflect the liquidity risk the investor takes until the securities are actually registered for resale.  The advantages of a PIPE include:

• Speed and lower cost. Because the investment documents are not reviewed by the SEC and no general solicitation is involved, PIPEs can be completed more quickly and cheaply than public offerings. It is not uncommon for a PIPE offering to be completed in less than a month. Registered public offerings take much longer.

• Price. Even though PIPEs are sold at a discount to current public market price, this discounted price can still be higher than what the public offering price would have been. Public markets can be unpredictable and company stock prices sometimes fall after a secondary public offering of securities is announced. The PIPE price is typically discounted against the company’s public security price determined before announcement of the PIPE.

• Confidentiality and reduced volatility. Because the sale by the company is completed before public announcement, the transaction is confidential until closed. The limited number of accredited investors permitted in a PIPE makes the PIPE offering less subject to volatility than a registered public offering.

• Reduced time consumption. PIPEs are less time consuming to complete than public offerings.

Notwithstanding their advantages, PIPEs are usually entered into cautiously and carefully structured. Care must be taken by the company and the investment banker to conduct the offering in a way that complies with applicable securities laws. The very existence of a PIPE program, when it involves raising substantial capital and is kept confidential, constitutes material insider information that should keep company management and investor prospects out of the public market. If information leaks out before the transaction, short sellers can enter the company’s public market and drive securities prices down.