08/28/2009 02:20:58 PM EST
Securities Practice Guide Excerpt: Conducting A PIPE Offering
What Is A PIPE?
The term PIPE, an acronym for “private investment in public equity,” refers to the private placement of a public company’s securities to select investors. The issuer company enters into a purchase agreement with investors whereby the investors agree to purchase a certain amount of securities from the issuer. The issuer agrees that, following the actual purchase of the securities by the investors, it will file a resale registration statement with the SEC registering the common stock purchased (or in the event of a sale of convertible securities, the common stock received upon conversion of the securities purchased) which will enable the investors to resell them publicly. Typically, issuers that conduct PIPE transactions have a market capitalization under $400 million dollars while the participating investors must qualify as “accredited investors,” as such term is defined by Rule 501(a) of Regulation D as promulgated by the SEC. Some recent exceptions, however, are the PIPE investments by Berkshire Hathaway of $3 billion in General Electric and $5 billion in Goldman Sachs.
In a PIPE transaction, an issuer has the flexibility to offer various types of equity or equity-linked securities to investors such as:
• Common stock at a fixed price or variable prices
• Equity lines of credit
• Convertible preferred stock
• Warrants
• Convertible debt
Strategic Point: When do issuers consider conducting a PIPE
offering?
Certain characteristics common among issuers that seek to conduct PIPE transactions include:
• The issuer has little to no cash and without additional financing the issuer will exhaust its cash reserves in the near future
• The issuer’s lack of collateral and/or poor financial performance precludes its ability to obtain loans from banks
• The demand for the issuer’s common stock remains consistently low
• Institutional investors are not confident in, or familiar with, the issuer and other traditional sources of private equity financing are not available
This section explores some of the legal and strategic considerations that an issuer conducting a PIPE offering should take into account during the various stages of the transaction as well as the mechanics of conducting a PIPE offering.
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