Private Investment in Public Equity (PIPE)

Definition:

A type of Offering (although rarely referred to as such because the securities are not offered for sale to the public) conducted by issuers with registered, publicly traded equity securities to quickly and cheaply raise additional capital.

The transaction involves the sale, by way of a Private Placement of equity securities (either newly issued or out of treasury) to Accredited Investors. There are two types of PIPE transactions: traditional and structured. In a traditional PIPE transaction, the equity securities are offered at a discount to market price. In a structured PIPE transaction, the investor is offered Convertible Bonds or Preferred Stock at a slight premium to market price. In either event, following the Private Placement, the issuer undertakes to file a Registration Statement to allow for the public resale of the equity securities as soon as possible after the Private Placement.

PIPE deals are attractive to issuers as they generally complete more quickly than other Offerings, involve limited Due Diligence, and, in the case of a traditional PIPE transaction, only require shareholder consent if the offering represents more than 20% of the issuer’s equity capital. A structured PIPE transaction does not require shareholder consent. To the extent that they increase the supply of a company’s stock in the market, PIPE offerings can potentially dilute the value of existing shares.

PIPE transactions also offer an alternative funding option for a SPAC seeking to finance its business combination rather than raising additional finance from traditional sources. A PIPE offers a speedier and certain alternative to some traditional methods of fund raising and is more appropriate for a SPAC. The PIPE may also mean there is a cushion of capital in case investors in the SPAC decide to sell their shares after a target is announced.

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