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Equity Financing
Private Investment in Public Equities (PIPEs)
A PIPE (or Private Investment in Public Equity) is a privately issued equity or equity-linked security that is sold by public companies to investors under Regulation D of the Securities Act of 1933. In essence, a PIPE is a purchase of stock in a company at either a discount or premium to the current market value per share.
PIPE transactions are marketed to a limited number of investors over a short period of time. More traditional public offerings require a broader marketing process, and in the case of an add-on offering, the filing of a registration statement with the SEC. This filing process tends to create an “overhang” of shares in the market, resulting in an “announcement effect” on the issuer’s stock. This announcement effect can cause a decline in the stock price prior to pricing, sometimes resulting in a significant loss in value. PIPEs mitigate this announcement effect as they do not require filing with the SEC, thus preserving the issuer’s stock value.
PIPE issuers range in size from small OTC bulletin board companies to large-cap NYSE-traded companies. Although PIPE transaction sizes can range from under $1 million to over $200 million, they typically support a targeted market of small and micro-cap companies that do not appeal to the traditional public market investor, as well as mid-cap companies that prefer faster execution and confidentiality.
In the 1990s, PIPE transactions were primarily desperation financings for small and distressed high-growth companies, typically with unfavorable issuer terms. Floating conversion prices prompted investors to short the issuer’s stock to drive down the exercise price of their securities, in effect destroying the issuer’s market cap in consequences referred to as “death spirals.” This negative effect impacted the market, and PIPEs have now become more institutionalized; structured with more issuer-friendly terms and once again making the PIPE a viable option for equity financing.
For companies that are able to access traditional public alternatives for larger amounts (typically above $75 million), pricing at the close of the transaction may be more issuer-friendly than a PIPE transaction, due to broader marketing and the lack of any liquidity discount associated with receiving unregistered securities. However, careful review of the entire process must be conducted to determine the full array of strengths and weaknesses associated with each alternative.
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