Private Investment In Public Equity Financing – PIPE Financing

What is a Private Investment In Public Equity or PIPEs?

Private Investment in Public Equity (PIPE) is an alternative method of raising equity capital for public exchange listed companies. It involves the injection of equity (common stock or convertible securities) into listed companies by institutional investors in private placements. PIPEs do not trigger pre-emption rights with regard to existing shareholders but come with shareholder approval.

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 and trading 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.

At our corporate financing institutions, they excel in two primary types of PIPE transactions, their most sought-after product being the Distressed Debt Consolidation and Recapitalization. This innovative structure involves collaborating closely with the creditors of public companies to establish a structured settlement.

They then acquire specific portions of the company’s debt from the creditors, offering them shares of their common stock in return. This approach allows them to make equity investments and actively engage in the market, resulting in a mutually advantageous arrangement for all parties involved.

PIPE’s: What Other Types Of Publicly Listed Company Financing Do We Offer

ELOCs (Equity Line of Credit):

At our company, we offer ELOCs as a flexible financing option for public companies. Unlike traditional financing options, ELOCs do not have strict qualifying rules beyond being a public company. Once the ELOC is established, clients can make drawdowns based on a percentage of their trading volume, typically on a daily or weekly basis. It’s important to note that if a company doesn’t trade, they won’t be eligible to utilize the facility. However, having an ELOC in place is still beneficial, as it provides a means to capture liquidity in the event of unexpected high-volume trading days.

PIPEs (Private Investment in Public Entity):

We specialize in two main types of PIPE transactions. The first one, which is our most popular product, is the Distressed Debt Consolidation and Recapitalization. In this structure, we work with the public company’s creditors to create a structured settlement. We then purchase tranches of debt from the creditors in exchange for shares of common stock. Through this process, we make equity investments and actively participate in the market, creating a mutually beneficial arrangement.

The second type of PIPE involves conducting a comprehensive review of the company, management team, and fundamentals. Both types of PIPEs require a minimum daily trading volume of $100,000 to initiate the review. In this second structure, we engage in a private placement with the company, purchasing convertible preferred shares along with warrants. We then break down the funding into several installments based on predefined milestones. In these PIPE transactions, we provide extensive consulting and advisory services, including IR/PR support, legal guidance from our in-house counsel, comprehensive capital markets consulting, M&A consulting, operational development, cap table management, high-profile board of directors placements, and subsequent financing’s.

Convertible Bonds:

For foreign issuers (non-US), we offer convertible bond solutions that can be closed as quickly as 24 hours, primarily based on trading volume.

SEPA (Standby Equity Purchase Agreement):

SEPA is similar to ELOC but is typically used in non-US markets. The mechanisms are the same, but foreign issuers can often reach a definitive agreement and receive initial funding within a few days. In contrast, US ELOCs require filing an S1 registration statement, which incurs legal expenses and takes 20-40 days for SEC approval. Both ELOCs and SEPAs, depending on trading volume, can receive advance funding to bridge or supplement a larger initial tranche.

Registered Direct Offerings:

Registered Direct Offerings, also known as Secondary Offerings, are primarily available to companies listed on NYSE/NASDAQ that have an effective S3 shelf registration. These offerings involve selling freely tradable registered stock from the shelf registration. Eligibility for S3 registration is based on the company’s liquidity profile, which determines the discount and size of the equity purchase.

 

How Does A Private Investment In Public Equity Deal Work In Simplistic Terms?

Private investment in public equity (PIPE) is when certain big investors buy shares of a company’s stock that’s already being traded on the stock market, but they buy it at a price that’s lower than what everyone else is paying.

Usually, investment firms, big mutual funds, and other wealthy investors do this. There are two main types of PIPE deals: traditional and structured.

In a traditional PIPE deal, the company sells its regular stock or preferred stock to the investor at a fixed price. In a structured PIPE deal, the company sells a type of debt that can later be turned into stock.

The reason companies do this is to raise money. It’s a quicker and simpler way for them to get cash compared to other methods that involve more rules and regulations set by the government.

Companies might use a PIPE deal to get money for things like paying their bills, expanding their business, or buying other companies. They can either make new shares of stock or use some of the ones they already have, but they don’t sell these shares on the regular stock market.

Instead, these big investors buy the company’s stock in a private deal, and then the company registers these shares with the government so that these investors can sell them later on the regular stock market.

Usually, the company gets the money from these investors within a few weeks, which is much faster than if they were to go through the process of selling more shares on the regular stock market. And after about a month, the government approves the registration of these new shares.

In The Most Simplistic Terms A Private Investment In Public Equity Is Like The Below

Imagine a big, bustling marketplace where lots of people are buying and selling goods. Now, picture a special section of this marketplace where only certain wealthy individuals are allowed to shop. This section is called the “Private Investment” area.

In this Private Investment area, there are companies that have already set up shop in the main marketplace, selling their products to everyone. These companies need some extra cash to keep their businesses running smoothly or maybe to expand and grow even bigger. So, they decide to offer a special deal to these wealthy individuals.

Instead of selling their products at the regular price everyone else is paying, these companies offer to sell their products at a slightly lower price, but only to these wealthy individuals in the Private Investment area. This special deal is called “Private Investment in Public Equity” or PIPE for short.

The companies hope that by offering this deal, they can quickly get the money they need from these wealthy investors without having to go through a lot of complicated paperwork and regulations. It’s like a shortcut to getting the cash they need to keep their businesses running smoothly and maybe even make them bigger and better.

A PIPE transaction has some big benefits for the company issuing the stock. Here’s why:

Lower transaction costs: PIPEs typically involve lower fees and expenses compared to other methods of raising capital, which can save the company money.

Access to capital: PIPEs provide a quick way for companies to raise funds, especially when they need cash urgently or cannot access traditional financing options.

Expansion of investor base: By attracting institutional and accredited investors, companies can broaden their investor base and potentially increase market confidence in their stock.

Reduced stock shorting risk: In fixed-price transactions, PIPEs can reduce the risk of investors shorting the company’s stock, which can stabilize the stock price.

Limited public disclosure: Companies only need to disclose the transaction to the public after receiving firm commitments from investors, allowing them to maintain confidentiality until the deal is finalized.

Streamlined process: The process of completing a PIPE transaction is often faster and involves less administrative burden compared to other fundraising methods, allowing companies to access funds quickly.

Faster funding: Once definitive purchase commitments are received, PIPE transactions can close and fund within a relatively short timeframe (usually seven to ten days), providing timely access to capital.

Overall, PIPE transactions offer companies a convenient, cost-effective, and efficient way to raise capital while expanding their investor base and minimizing market risks

Investors Also Benefit From PIPE Transactions in Several Ways

Access to investment opportunities: Investors get a chance to buy stocks of companies at potentially favorable terms.

Diversification: PIPE transactions allow investors to diversify their investment portfolios by gaining exposure to different companies and industries.

Potential for returns: If the company performs well in the future, investors could see their investment grow in value, potentially providing significant returns.

Streamlined process: Participating in a PIPE transaction typically involves less paperwork and faster processing compared to other investment methods, making it more convenient for investors.

Potential for influence: Depending on the size of their investment, investors may have a say in the company’s decisions and direction, giving them a chance to influence its future.

Overall, PIPE transactions offer investors an opportunity to invest in companies with potential for growth while providing certain advantages in terms of convenience and potential returns.

Introduction to Private Investment In Public Equity Financing

Private Investment in Public Equity (PIPE) financing is when private investors put a lot of money into companies that are already trading publicly on the stock market. They usually do this when the company’s stock prices are low, to help the company financially. This method lets these companies quickly get more money by selling shares to private investors at a lower price than usual. It’s a way for them to get a quick boost of cash when they need it.

PIPE financing is important for companies because it gives them another option for raising money when the usual ways might not work well. It’s flexible and can help them when the market is tough. For example, during the COVID-19 pandemic, Carnival Corporation managed to get more money by doing a PIPE deal with Saudi Arabia’s sovereign wealth fund. This helped them have more cash on hand and showed how useful PIPE financing can be during hard times.

In a PIPE deal, companies sell shares to private investors instead of offering them to the public. This is often done when it’s hard to raise money through regular methods. In 2008, these deals brought in $88.3 billion in the US. Hedge funds often like these deals because they can get shares at a discount, but it can also make existing shareholders unhappy because it dilutes their ownership and can lower the value of their shares. The Securities and Exchange Commission (SEC) keeps a close eye on PIPE deals to make sure they follow the rules. They’re also commonly used in mergers involving smaller public companies, showing that PIPE financing can work for different types of businesses.

Process of PIPE Financing

In PIPE financing, publicly traded companies sell shares directly to investors without having to go through the usual process of registering with the government. This means they can raise money faster without dealing with a lot of regulations. For example, during the COVID-19 pandemic, Carnival Corporation sold shares to Saudi Arabia’s sovereign wealth fund at a lower price through a PIPE deal to get money quickly.

Accredited private investors, who have the money and knowledge to invest, play a big role in PIPE deals. The Securities and Exchange Commission (SEC) watches over these transactions to make sure everyone follows the rules and protects the interests of both the companies and the investors.

PIPE financing helps companies get money fast without dealing with a lot of red tape. This lets them respond quickly to opportunities or problems in the market, making them more competitive. Involving experienced investors in PIPE deals also brings in valuable knowledge and insights, benefiting both the companies and the investors. By using PIPE financing, companies can get the money they need to grow and build partnerships with investors for long-term success.

Advantages of Utilizing PIPE Financing

PIPE financing provides public companies with expedited access to capital, allowing them to bolster their financial position swiftly in times of need. This immediate infusion of funds can be crucial for companies facing urgent financial requirements or seeking to capitalize on unforeseen opportunities. For example, during the COVID-19 pandemic, Carnival Corporation successfully raised capital through a PIPE deal with Saudi Arabia’s sovereign wealth fund. This strategic move not only fortified Carnival’s cash reserves but also enabled the Saudi PIF to acquire a stake in the company at a reduced price, indicating the mutual benefits that can arise from PIPE transactions.

Moreover, PIPE financing offers an economical alternative for corporations compared to traditional equity financing methods. By offering securities at discounted prices to investors, public companies can attract capital without incurring excessive costs associated with other fundraising approaches. This cost-effective nature of PIPE deals makes them particularly appealing for smaller and medium-scale companies that may struggle to access capital through conventional means. Therefore, PIPE financing not only streamlines the fundraising process but also presents an attractive option for companies of varying sizes looking to secure capital efficiently and at a reasonable cost.

A significant advantage of PIPE financing is its ability to provide companies with a source of capital that is flexible and responsive to market conditions. Unlike traditional financing methods that may involve lengthy approval processes or regulatory hurdles, PIPE transactions offer a more agile and streamlined approach to raising funds, allowing companies to seize opportunities or address challenges promptly. Additionally, the participation of accredited private investors in PIPE deals brings a level of financial expertise and market knowledge that can benefit companies in their strategic decision-making processes. This collaborative approach not only enhances the success of PIPE transactions but also fosters long-term partnerships that can drive sustainable growth and value creation for companies and investors alike.

Disadvantages of PIPE Financing

While PIPE financing offers a quick and efficient way for public companies to raise capital, there are inherent disadvantages that companies and investors should be mindful of. One significant risk associated with PIPE financing is the possibility of selling securities below their market value, which can result in the dilution of share value for existing shareholders. This dilution can impact the ownership percentage of current shareholders, potentially reducing their control and influence within the company.

Moreover, the limited availability of PIPE transactions to accredited investors can pose challenges in accessing this form of financing. Accredited investors, who are typically institutional or high-net-worth individuals, may have specific criteria to meet before participating in a PIPE deal. This exclusivity can restrict the pool of potential investors, limiting the opportunities for companies to secure the necessary capital through PIPE transactions. Therefore, while PIPE financing can offer advantages in terms of expediency, companies must carefully weigh these disadvantages to make informed decisions about their capital-raising strategies.

Another disadvantage of PIPE financing is the potential impact on the share price and market perception of the company. When companies offer shares at a discounted price through a PIPE transaction, it can signal financial distress or a need for immediate capital, potentially leading to negative market sentiment and shareholder concerns. Additionally, the dilution of existing shareholders’ ownership stake as a result of issuing new shares at a discount can create tensions among investors and impact the company’s stock performance. Therefore, companies must navigate these potential drawbacks of PIPE financing carefully to mitigate risks and preserve shareholder value.

Successful Examples of PIPE Transactions

Real-world examples of successful PIPE transactions provide valuable insights into the strategic benefits of this financing method for companies. For instance, Carnival Corporation’s decision to raise capital through a PIPE with Saudi Arabia’s sovereign wealth fund amid the COVID-19 pandemic illustrates how companies can strategically leverage PIPE financing during times of economic uncertainty. By securing immediate funding through a PIPE transaction, Carnival Corporation was able to enhance its financial flexibility and weather the challenges posed by the global health crisis, showcasing the resilience and adaptability facilitated by PIPE financing.

Moreover, the case of BioPharma Inc. offering shares at a discount to private equity firms for prompt funding exemplifies the practical advantages of PIPE transactions for companies in need of capital infusion. This example underscores how PIPE financing can provide a swift and efficient means for companies to access additional funds, enabling them to pursue growth opportunities, fund essential operations, or navigate turbulent market conditions effectively. By strategically utilizing PIPE financing, companies like BioPharma Inc. can optimize their capital structure and enhance their financial sustainability, underscoring the instrumental role of PIPE transactions in fortifying businesses during challenging times.

Additionally, successful PIPE transactions have been instrumental in bolstering the financial positions of companies across various industries, demonstrating the versatility and adaptability of this financing method. Companies that have effectively leveraged PIPE financing have not only strengthened their balance sheets but have also positioned themselves for sustained growth and profitability. By examining these successful examples, companies can glean valuable insights into the strategic advantages of PIPE transactions and the potential benefits they offer in enhancing financial stability and long-term viability.

Importance of PIPE Financing for Startups and Venture Capital

Private Investment in Public Equity (PIPE) financing plays a pivotal role in the landscape of venture capital, offering unique opportunities for startups seeking capital infusion and growth. For startups navigating the complex terrain of fundraising, understanding and leveraging PIPE financing can be crucial for their success and expansion. By tapping into PIPE transactions, startups can access additional capital efficiently, enabling them to execute their business strategies, develop innovative products, and expand their market reach.

A compelling example showcasing the significance of PIPE financing for startups is the case of a tech startup that, during a period of low equity valuations, engaged in a PIPE deal with a prominent venture capital firm. This strategic move not only provided the startup with the necessary capital injection to scale its operations but also fostered a valuable partnership with the investor, bringing in expertise and networking opportunities. Moreover, PIPE financing offers startups a streamlined approach to raising funds quickly, especially when traditional financing avenues may be limited or less accessible. This aspect is particularly beneficial for early-stage companies looking to fuel their growth trajectory and establish a solid financial foundation. Through PIPE transactions, startups can secure the resources needed to innovate, expand their market presence, and ultimately enhance their competitiveness in the industry.

Furthermore, the importance of PIPE financing for startups extends beyond the initial capital infusion, encompassing strategic partnerships, mentorship opportunities, and access to a network of industry experts. By engaging in PIPE transactions, startups can not only secure the financial resources necessary for growth but also leverage the expertise and guidance of seasoned investors to navigate the challenges and complexities of scaling their businesses. This collaborative approach to fundraising not only accelerates the growth trajectory of startups but also positions them for long-term success and sustainability in competitive markets. Therefore, understanding the significance of PIPE financing for startups is essential for entrepreneurs and early-stage companies looking to secure capital and establish a solid foundation for growth and expansion.

Regulatory Environment and Scrutiny of PIPE Transactions

The regulatory environment surrounding PIPE transactions plays a crucial role in shaping the landscape for companies and investors engaging in this form of financing. Countries like the US, Australia, Canada, and the UK have established frameworks that are conducive to PIPE deals, providing a structured platform for public companies to access capital efficiently. These regulatory environments aim to balance the needs of companies seeking funding with investor protection, ensuring transparency and accountability in the process. For instance, in the US, the Securities and Exchange Commission (SEC) oversees PIPE transactions, monitoring compliance with securities laws and regulations to maintain market integrity.

Moreover, regulatory bodies, such as the SEC, closely scrutinize PIPE investments to prevent violations of securities laws, particularly in cases involving hedge funds. This scrutiny underscores the importance of adherence to legal requirements and ethical practices in PIPE transactions to safeguard the interests of all stakeholders involved. By maintaining regulatory oversight, authorities aim to mitigate risks associated with PIPE financing, such as potential market manipulation or insider trading, thereby fostering trust and confidence in the financial markets. Additionally, the regulatory scrutiny surrounding PIPE transactions serves to uphold market integrity and protect investors from fraudulent or deceptive practices, promoting a fair and transparent investment environment for all stakeholders.

Furthermore, the regulatory scrutiny surrounding PIPE transactions extends to the disclosure and transparency requirements imposed on companies engaging in these financing activities. Public companies are often required to provide detailed information about the terms of the PIPE deal, the use of proceeds, and any potential risks or conflicts of interest that may arise from the transaction. By enhancing transparency and accountability in PIPE transactions, regulatory bodies can ensure that investors are adequately informed and protected when participating in these financing arrangements. This regulatory oversight not only safeguards the interests of investors but also promotes market efficiency and integrity, fostering a conducive environment for capital formation and investment in the public equity markets.

Comparison of Traditional and Non-Traditional PIPE Deals

When exploring Private Investment in Public Equity (PIPE) financing, it is essential to understand the distinctions between traditional and non-traditional PIPE deals. Traditional PIPE deals typically involve the issuance of common or convertible preferred stocks to private investors at discounted prices, providing companies with an alternative means of raising capital. On the other hand, non-traditional PIPE transactions may include the sale of convertible debt securities to private investors, offering a different financial instrument for companies looking to secure funding.

In traditional PIPE deals, companies offer shares at a discount to private investors, allowing them to access capital quickly without the need for federal registration. This method is often preferred by small to medium-scale public companies facing challenges in traditional equity financing, as it offers a streamlined approach to fundraising. Conversely, non-traditional PIPE transactions involve selling securities to private investors at fixed or variable prices lower than the market value, presenting a unique opportunity for investors to acquire assets at a discounted rate. An example of this could be a company issuing convertible debentures to private investors who are willing to invest in the company’s growth potential.

Furthermore, the distinction between traditional and non-traditional PIPE deals lies in the types of securities involved and the pricing strategies adopted by companies seeking to raise capital. Traditional PIPE transactions typically involve the issuance of common or convertible preferred stocks, which offer investors an equity stake in the company at a discounted price. On the other hand, non-traditional PIPE deals may include the issuance of convertible debt securities, such as convertible bonds or debentures, which provide investors with the option to convert their debt into equity at a predetermined price. By understanding the differences between these two approaches, companies can tailor their financing strategies to meet their specific capital needs and investor preferences, optimizing the outcomes of their PIPE transactions.

Specifics of PIPE Deals and Shareholder Impact

Private Investment in Public Equity (PIPE) deals involve a specific group of accredited private investors with significant financial resources and market knowledge participating in transactions with publicly traded companies. These investors play a crucial role in providing additional capital to companies, typically by purchasing restricted new shares at a pre-agreed price. The participation of accredited investors ensures that the companies can access funding efficiently while offering the investors an opportunity to acquire shares at a discounted rate. However, the involvement of accredited private investors also brings challenges, such as potential share dilution and the offering of shares at prices lower than the market value, impacting existing shareholders.

The impact of PIPE deals on existing shareholders can vary, with some shareholders viewing the dilution of their shares negatively, while others may see the influx of capital positively, potentially leading to company growth and increased shareholder value. Shareholders need to carefully consider the implications of PIPE financing on their investments, weighing the benefits of additional capital against the risks of share dilution and potential decrease in share value. Moreover, the illiquidity of shares purchased through PIPE deals can pose challenges for shareholders, as these shares may not be readily tradable, affecting their ability to adjust their investment portfolios swiftly. Overall, understanding the specifics of PIPE deals and their impact on shareholders is essential for investors looking to navigate the complexities of this financing method.

Additionally, the shareholder impact of PIPE financing extends beyond the immediate dilution of share value, encompassing broader implications for corporate governance and shareholder relations. Companies engaging in PIPE transactions must consider the long-term effects of these deals on their shareholder base, investor confidence, and overall market perception. By proactively addressing shareholder concerns and communicating effectively with investors, companies can mitigate potential risks associated with PIPE financing and build trust and credibility within the investment community. Moreover, transparent and open communication with shareholders can help companies navigate the complexities of PIPE transactions and ensure that all stakeholders are aligned with the company’s strategic objectives and growth trajectory.

Future Trends and Conclusion in PIPE Financing

Looking ahead, the future trends in PIPE financing indicate a continued strategic option for public companies facing fundraising challenges and seeking alternative capital sources. One prominent trend is the increasing utilization of PIPE transactions by companies during challenging economic periods, such as the aftermath of the COVID-19 pandemic. For instance, Carnival Corporation’s successful capital-raising through a PIPE with Saudi Arabia’s sovereign wealth fund exemplifies how companies adapt to adverse market conditions by leveraging PIPE financing for immediate funding. This trend showcases the resilience and flexibility of PIPE deals as a valuable financial tool in turbulent times.

Furthermore, the conclusion drawn from the discussion on PIPE financing emphasizes its significance as a strategic option for companies, particularly when navigating uncertain market conditions. The key takeaway is that while PIPE transactions offer quick access to capital and discounted securities for investors, they also come with inherent risks and regulatory complexities that companies and investors must carefully consider. As companies increasingly explore PIPE financing as a viable fundraising avenue, it is essential to monitor future trends, regulatory developments, and market dynamics to make informed decisions regarding the utilization of PIPE transactions. In essence, PIPE financing continues to evolve as a dynamic and impactful mechanism for capital infusion in the public equity market.

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.

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;

and

• 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

Engagement letter For PIPE Transactions

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?