What is a Private Investment In Public Equity or PIPEs?
Private Investment In Public Equity or PIPE deals are privately negotiated transactions in which an investor or group of investors makes a direct investment into a public company whose shares are publicly listed on a stock exchange. The investment usually comprises ordinary shares, preferred shares, convertible debt, warrants, or a mixture of these. The shares are generally offered at a discount to the prevailing share price of the company. PIPEs can frequently be done in short order as they are often structured in a way that avoids the need for shareholder approval or a prospectus.
Advantages – Public Companies
The advantages to a company looking into Private Investment Public Equity is that the company can gain quick access to much needed cash for securing funds for working capital to fund day-to-day operations, expansion, or even new business acquisitions. The company will also not have to adhere to strict regulatory reporting standards of public offerings as the reporting is less strict and can be filed a lot more quickly.
Advantages – PIPE Investors
The advantages for a PIPE investor are that it can acquire a significant stake in a listed company often at a healthy discount and without having to pay a control premium, and the fact that the company is already listed means that, in principle, there is already a liquid market into which the investor can sell its shares when it wishes to exit (at least, once the lock-up expires). In the US, preferred stock or convertible instruments usually contain a liquidation preference, making them less risky than common stock.
PIPE Key Points
- Private investment in public equity (PIPE) is when an investor buys stock directly from a publicly listed company below the current market price.
- Because they have less stringent regulatory requirements than public offerings, PIPEs save companies time and money and raise funds more quickly.
- The discounted price of PIPE shares means less capital for the company but fast liquidity without the need for reporting rules to the exchanges.
- A stock issuer generally cannot sell more than 20% of its outstanding stock at a discount without receiving prior approval from current shareholders.
Company Advantages To Using Private Investment In Public Equity or PIPE’s
Fast source of capital funds usually 2 to 3 weeks
Less paperwork and legal filing requirements
Lower transactional costs
Discounted share prices (for investors)
How a Private Investment in Public Equity Works
A publicly-traded company may utilize a PIPE when securing funds for working capital to fund day-to-day operations, expansion, or acquisitions. The company may create new stock shares or use some from its supply, but the equities never go on sale on a stock exchange. Instead, these large investors purchase the company’s stock in a private placement, and the issuer files a resale registration statement with the SEC or relevant regulatory authority in their country of stock listing.
The issuing business typically obtains its funding—that is, the investors’ money for the shares—within two to three weeks, rather than waiting several months or longer, as it would with a secondary stock offering. Registration of the new shares with the SEC typically becomes effective within a month of filing.
PIPE Benefits for investors
Historically, the types of investor most willing to participate in PIPE transactions have been institutional, though investors differ depending on the particular situation, such as whether the company is distressed or healthy. Generally, there will be investors that are committed sector investors, and these include mutual funds and other asset managers, There may be private equity (PE) and venture funds, and there may be financial or opportunistic investors, such as hedge funds.
During periods of crisis or difficulty, PE funds may find that uncertainty around private company valuations makes such investments more difficult to execute. PIPE transactions offer them the opportunity to take a significant stake in a public company at a negotiated, discounted price, and in some cases even secure a seat on the target’s board. Through PIPEs, PE firms can also deploy capital quickly when activity in private markets slows or when deal pipelines are running dry. They can also support PE firms looking to fulfill certain fund mandates.
While some PIPE investors have tended to be focused on short-term investment, more recently PE investors have shown an interest in acquiring substantial minority positions if the issuer is a strong company, established in one of the industries that the investor has experience in, and is one where the investor may be able to negotiate control rights.
What is a traditional PIPE transaction?
A traditional PIPE transaction is a private placement of either newly-issued shares of common stock or shares of common stock held by selling stockholders (or a combination of primary and secondary shares)
of an already-public company that is made through a placement agent to accredited investors. Investors in a traditional PIPE transaction commit to purchase a specified number of shares at a fixed price, and the issuer commits to filing a resale registration statement covering the resale from time to time of the purchased shares. The closing is conditioned upon, among other things, the SEC’s preparedness to declare that resale registration statement effective.
What are the standard terms of a traditional PIPE transaction?
A traditional PIPE transaction generally involves the following features:
• private placement to selected accredited investors
• investors irrevocably commit to purchase a fixed number of securities at a fixed price, not subject to market price adjustments or to fluctuating ratios
• purchase agreements generally contain a limitation on blackout periods
• immediately following execution of purchase agreements with investors, the issuer files a resale registration statement covering resales from time to time of the restricted securities to be sold in the transaction, naming the purchasers as “Selling Stockholders”
• closing of the PIPE transaction occurs promptly upon notice of the SEC’s or local regulators willingness to declare the resale registration statement effective;
• the resale registration statement is effective until shares may be sold free of restrictions under Rule 144.
Key documents in a PIPE transaction
• Engagement letter between issuer and placement agent
• Trading restrictions/confidentiality agreements with investors
• Private placement memorandum/investor presentation
• Purchase agreement/registration rights agreement
• Legal opinions
• Closing documents
• Comfort letter may be requested by placement agent
• Press release/Form 8-K to announce transaction and file material agreements
• Resale registration statement
• This is often the only binding agreement between the issuer and the placement agent
• Describes the placement agent’s fees
• Expense reimbursement
• Exclusivity period – “tail”
– Frequent subject of negotiation: As to which investors does the issuer pay the placement agent? What is the duration of the tail?
– Is there a right of first refusal?
• Indemnification provisions
• Conditions precedent – will placement agent receive a comfort letter? Will the placement agent be the addressee of the legal opinions? Will the issuer’s counsel deliver a negative assurance?