What Is Private Investment in Public Equity (PIPE)?

Private Investment in Public Equity (PIPE) Explained

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Private investment in public equity (PIPE) refers to a private placement where an already public company sells shares directly to accredited investors. The investor commits to buying a certain amount of securities, while the issuer agrees to file a resale registration statement.

While there are several benefits to private placements in public equity, these transactions are limited to accredited investors. Even if you can’t purchase shares in a PIPE transaction, it’s important to understand how they work and how they may affect other shareholders.

Definition and Examples of Private Investment in Public Equity

PIPE occurs when an investor purchases private shares in a publicly traded company. The securities in a PIPE transaction are issued via private placement, which is the sale of securities outside of the public market. A PIPE can take place with a variety of securities, including common stock, convertible preferred stock, convertible debentures, warrants, and more.

In a PIPE transaction, there are two parties: the issuing company and an accredited investor. Companies that use PIPE transactions most often have substantial capital requirements. Examples include companies in industries like science, biotech, real estate, and technology.

An accredited investor can be either an individual or an entity. Individual accredited investors must have an income of more than $200,000, a net worth of more than $1 million, or a Series 7, 65, or 82 license. Entity or trust accredited investors must have more than $5 million in investments or equity owners who are all accredited investors.

  • Acronym: PIPE

How Does Private Investment in Public Equity Work?

A PIPE transaction takes place between a publicly traded company and an accredited investor. The securities are generally either newly issued shares of common stock or existing shares held by a selling shareholder. The investor commits to purchasing a certain number of securities at a fixed price. After the purchase agreement is executed, the issuer of the securities must file a resale registration statement, which gives the investor the right to resell the shares to the public.

The closing of a PIPE transaction takes place as soon as the Securities and Exchange Commission (SEC) declares that the resale registration statement to be effective. At that time, the accredited investor pays the issuing company for the securities.

The securities in PIPE transactions are often issued at a slightly discounted price, which helps compensate for the fact that the purchaser carries most of the risk. It’s important to note that issuers generally can’t issue or place more than 20% of their outstanding stock in PIPE transactions without gaining shareholder approval upfront.

Traditional vs. Non-Traditional Private Investment in Public Equity

There are generally two types of PIPE transactions. A traditional PIPE, described above, involves an accredited investor committing to purchase common stock from a company at a fixed price in exchange for the issuing company filing a resale registration statement.

Additionally, understanding the features of a non-traditional PIPE transaction is just as important.

What Is a Non-Traditional PIPE Transaction?

In a non-traditional PIPE transaction, also known as a structural PIPE transaction, a publicly traded company issues a private placement to accredited investors. The investors commit to purchase securities at either a fixed or a variable price. If the agreement has a variable price, there are parameters in the agreement that include restrictions on pricing and the number of shares that can be issued.

Like in a traditional PIPE transaction, the purchaser in a non-traditional PIPE transaction receives a resale registration statement. However, in this type of transaction, the purchaser pays for the securities at the closing, immediately following the execution of the agreement. At that time, they don’t yet have the resale registration agreement.

Pros and Cons of Private Investment in Public Equity

Pros
    • Discounted shares for the investor
    • Less paperwork required for the firm
    • Lower transaction costs for the issuer
Cons
    • Limited to accredited investors
    • Diluted shares for other shareholders
    • Shareholder approval may be required

Pros Explained

  • Discounted shares for the investor: Securities in a PIPE transaction are usually sold at a slight discount to their market price, making the deal cheaper for the investor.
  • Less paperwork required for the firm: Because a PIPE transaction is a private placement, the securities are exempt from traditional SEC registration requirements.
  • Lower transaction costs for the issuer: The limited public disclosure requirements result in less overhead on the part of the firm, which helps reduce costs.

Cons Explained

  • Limited to accredited investors: Only accredited investors can participate in PIPE transactions, meaning most investors aren’t eligible.
  • Diluted shares for other shareholders: In some cases, firms issue new common stock to use in PIPE transactions, which dilutes the shares of current stockholders.
  • Shareholder approval may be required: If the firm issues more than 20% of outstanding stock in a PIPE transaction, they must first get shareholder approval. This can be more burdensome for the firm, and the shareholders may choose not to grant approval.

What It Means for Individual Investors

Because a PIPE transaction is a form of private placement, only accredited investors can participate. Unfortunately, this means that most individual investors won’t meet the eligibility requirements. While this rule is in place to protect investors, it also means that individual investors don’t have access to the same discounted shares that accredited investors do in these transactions.

For current investors in a company that issues a PIPE transaction, be aware that the shares you own may be diluted because the company may issue new shares to complete the deal.

Key Takeaways

  • A private investment in public equity (PIPE) is a transaction in which a publicly traded company sells shares to accredited investors via a private placement.
  • In a PIPE transaction, an investor commits to buying a certain number of shares at a fixed price and, in exchange, the issuer provides a resale registration statement.
  • In a non-traditional PIPE transaction, the security price may be variable instead of fixed, and investors must pay before receiving the resale registration statement in return.
  • While PIPE transactions can be advantageous to both the firm and the accredited investor, most investors can’t participate, and the deal may dilute the shares of existing stockholders.