What is Private Investment in Public Equity?

A PIPE transaction, or private investment in public equity, is the practice of buying shares of publicly traded stock at a price under the CMV (current market value) per share. This is a very common practice among large accredited investors, as well as investment firms and mutual funds. A traditional PIPE is one in where a common or preferred stock is issued to the investor at a set price. Certified broker dealers often deal with PIPE transactions.

How Does it Work?

A publicly-traded company may use a PIPE as a way to secure capital for acquisitions, expansion, and to fund day-to-day operations. They may create new stock, but its equities are never up for sale on a stock exchange. Large investors instead buy the company’s stock in what’s called a private placement. The issuer then files a resale resignation statement with the SEC and the registration of the new shares usually becomes effective within a month.

Special Considerations

The median size of an IPO deal in the United States is $108 million. PIPE investors may buy stock under the current market price as protection against the price dropping after news of the PIPE hits the mainstream. Because the offering was a PIPE, a buyer cannot legally sell their shares until after the resale resignation statement has been filed with the SEC. The low price of the PIPE also acts as compensation for the occasional delays in selling the shares or in converting them to cash.

In the case of a structured PIPE, prior stockholder approval may be needed as existing stockholders will be exposed to a greater risk of value dilution in shares while new investors will be shielded from these sorts of risks. Certified broker dealers can assist with navigating prior approval as well as assist existing stockholders.

The Bottom Line

PIPE transactions contain several notable advantages for their issuers and are especially useful for small- and medium-sized public companies which sometimes have difficulty securing more traditional forms of financing. Transactions also proceed very efficiently as they don’t have to meet all the typical federal registration requirements for stock offerings to the public, nor do they have to be registered with the SEC in advance.

However, the discounted share price does mean less capital for the company, and the diluted value for current shareholders may become an issue in some cases, so it’s always best to consider all of your options carefully before committing to a PIPE. It’s best to work with certified broker dealers when possible.