What is a"Private Investment In Public Equity" (P.I.P.E.)?
A private investment in public equity, often called a PIPE deal,
involves the selling of publicly traded common shares or some form of
preferred stock to private investors. In the U.S. a PIPE offering may be
registered with the Securities and Exchange Commission or may be
completed as an unregistered private placement.
PIPE transactions provide quick access to capital at a reasonable
transaction cost for companies that might otherwise be unable to access
the public equity markets. Some investors find PIPEs attractive because
they can purchase shares at a discount to the public market price and
because it provides an investor the opportunity to acquire a sizable
position at a fixed price rather than pushing the price of a stock
higher through its own open market purchases.
PIPEs and Mergers & Acquisitions
Many reverse mergers are accompanied by a simultaneous PIPE transaction,
which is typically undertaken by smaller public companies. Shares are
sold at a slight discount to the public market price, and the Company
typically agrees to use its best efforts to register the resale of those
same securities for the benefit of the purchaser
A Brief Introduction to PIPEs
In recent years management of many public companies have utilized PIPEs
("Private Investment in Public Equity") as a way to obtain equity
capital to finance growth, acquisitions or for working capital.
At the same time hundreds of investment funds have been established to
invest in PIPEs. And, many investment banking firms are also
specializing in placing PIPE transactions for client companies.
In a PIPE transaction, investors typically purchase securities directly
from a publicly traded company in a private placement. Depending on the
structure of the transaction, this can be done at a premium to or at a
discount from the market price of the company's common stock. Because
the sale of the securities is not pre-registered with the Securities and
Exchange Commission (SEC), the securities are 'restricted' and cannot
be immediately resold by the investors into the public markets.
Accordingly, the company will usually agree as part of the PIPE
transaction to register the restricted securities with the SEC. Thus,
the
PIPE transaction can offer the company the speed and predictability of a
private placement, while providing investors with a nearly liquid
security.
Who are the PIPE Investors and What Are They Typically Looking For?
Hundreds, if not thousands of private equity funds or hedge funds have
been established over the past few years to invest in PIPEs. Some of
these are affiliates of major financial services firms such as Merrill
Lynch, Goldman Sachs and Citigroup. Others have been established by
private money management firms, individual investment advisors, or by
"family groups."
There is no regulation in the United States that limits the investment
criteria of any of these PIPE fund sponsors. However, many PIPE funds
have established their own criteria. For example, some may only be
interested in certain industry sectors, such as Energy; Biotech, Medical
& Healthcare, Technology, Real Estate and consumer goods.
In addition to PIPE funds, specific PIPE investment transactions are
marketed and sold to a wide range of investors, largely depending upon
the type of PIPE (e.g. pure as opposed to standard, traditional as
opposed to structured), the size and industry of the company and the
quality of the placement agent, if any, involved in the transaction.
Historically, PIPEs were not sold to traditional private equity
investors, but rather to sophisticated public market investors who
focused not only on the fundamentals of the company but also on the
technical aspects of public market investing dynamics, such as trading
volume, float and volatility. These investors generally do not seek
board seats or special approval rights and, apart from their right to a
resale registration, are content to be treated as 'outside,' passive
investors. Still others may have a geographical focus, such as Africa,
Latin America or China. Others may have specific criteria regarding the
subject companies that are appropriate for their investment, such as
companies whose shares trade on the OTC Bulletin Board, the New York
Stock Exchange, NASDAQ, the American Stock Exchange or foreign stock
exchanges.
Recently, a growing number of traditional venture capital firms have
made investments in PIPE transactions. Although many of these
investments have been structured in a fairly straight-forward manner, it
is not uncommon for venture capitalists to attempt to transpose to the
PIPE arena the full-blown rights and protections that they typically
seek with respect to private company preferred stock investments. Often,
such 'venture capital PIPE' investments will raise a host of issues
under the federal securities laws and corporate governance regulations.
The PIPE Transaction Itself
A significant advantage of PIPE transactions compared to traditional
public offerings is that they can be completed rapidly - typically two
to three weeks from kick-off to closing. In a typical PIPE transaction,
due diligence is limited in scope because of the compressed time frame,
and generally consists of a review of the company's filings with the SEC
and press releases and investigative conference calls with the
company's management, counsel and accountants.
The documentation for a PIPE financing is relatively minimal: typically
consisting of an offering circular summarizing the terms of the
financing and containing a description of the business of the company
taken directly from the company's filings with the SEC, a purchase
agreement, a registration rights agreement, an investor questionnaire, a
legal opinion from company counsel and, in the case of a convertible
preferred stock offering, a certificate of designations or charter
amendment defining the rights and privileges of the preferred stock.
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