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In a credit environment where capital markets are unwilling to provide financing or when a company wants to be capitalized by a stream of private capital, the obvious answer might be Private Investment in Public Equity (PIPE). A PIPE deal involves the selling of publicly traded common shares or some form of preferred stock or convertible security to private investors. In the U.S., a PIPE offering may be registered with the Securities and Exchange Commission on a Registration Statement or may be completed as an unregistered private placement.

For private equity investors, PIPEs tend to become increasingly attractive in markets where control investments are harder to execute. Often companies pursue PIPEs when capital markets are unwilling to provide financing and traditional equity market alternatives do not exist for that particular issuer. Many private equity funds or hedge funds have been established over the past several years to invest through PIPE structured transactions. Some of these are affiliates of major financial services firms. Others have been established by private money management firms, individual investment advisors, or by “family groups.”

The PIPE Advantage

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 timeframe, and generally consists of a review of the company’s filings with the SEC, review of press releases and participation in investigative conference calls with the company’s management, counsel and accountants.

Documenting PIPE Transactions

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. In the case of a convertible preferred stock offering, it also includes a certificate of designations or charter amendment defining the rights and privileges of the preferred stock.

After the closing of the financing transaction, the company and its counsel typically prepare and file the registration statement to register for resale by the investors the common stock issued (or issuable on conversion of preferred stock or other securities issued) in the PIPE. 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.

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