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| What is a"Private Investment In Public Equity" (P.I.P.E.)? |
From Wikipedia, the free encyclopedia This article is about Private Investments in Public Equity or PIPEs. For investments in private equity through publicly traded vehicles, see Publicly traded private equity. 2007-233 A private investment in public equity, often called a PIPE deal, involves the selling of publicly traded common shares or some form of preferred stock to private investors. In the U.S. a PIPE offering may be registered with the Securities and Exchange Commission or may be completed as an unregistered private placement. PIPE transactions provide quick access to capital at a reasonable transaction cost for companies that might otherwise be unable to access the public equity markets. Some investors find PIPEs attractive because they can purchase shares at a discount to the public market price and because it provides an investor the opportunity to acquire a sizable position at a fixed price rather than pushing the price of a stock higher through its own open market purchases. PIPEs and Mergers & Acquisitions Many reverse mergers are accompanied by a simultaneous PIPE transaction, which is typically undertaken by smaller public companies. Shares are sold at a slight discount to the public market price, and the Company typically agrees to use its best efforts to register the resale of those same securities for the benefit of the purchaser A Brief Introduction to PIPEs In recent years management of many public companies have utilized PIPEs ("Private Investment in Public Equity") as a way to obtain equity capital to finance growth, acquisitions or for working capital. At the same time hundreds of investment funds have been established to invest in PIPEs. And, many investment banking firms are also specializing in placing PIPE transactions for client companies. In a PIPE transaction, investors typically purchase securities directly from a publicly traded company in a private placement. Depending on the structure of the transaction, this can be done at a premium to or at a discount from the market price of the company's common stock. Because the sale of the securities is not pre-registered with the Securities and Exchange Commission (SEC), the securities are 'restricted' and cannot be immediately resold by the investors into the public markets. Accordingly, the company will usually agree as part of the PIPE transaction to register the restricted securities with the SEC. Thus, the PIPE transaction can offer the company the speed and predictability of a private placement, while providing investors with a nearly liquid security. Who are the PIPE Investors and What Are They Typically Looking For? Hundreds, if not thousands of private equity funds or hedge funds have been established over the past few years to invest in PIPEs. Some of these are affiliates of major financial services firms such as Merrill Lynch, Goldman Sachs and Citigroup. Others have been established by private money management firms, individual investment advisors, or by "family groups." There is no regulation in the United States that limits the investment criteria of any of these PIPE fund sponsors. However, many PIPE funds have established their own criteria. For example, some may only be interested in certain industry sectors, such as Energy; Biotech, Medical & Healthcare, Technology or Real Estate. In addition to PIPE funds, specific PIPE investment transactions are marketed and sold to a wide range of investors, largely depending upon the type of PIPE (e.g. pure as opposed to standard, traditional as opposed to structured), the size and industry of the company and the quality of the placement agent, if any, involved in the transaction. Historically, PIPEs were not sold to traditional private equity investors, but rather to sophisticated public market investors who focused not only on the fundamentals of the company but also on the technical aspects of public market investing dynamics, such as trading volume, float and volatility. These investors generally do not seek board seats or special approval rights and, apart from their right to a resale registration, are content to be treated as 'outside,' passive investors. Still others may have a geographical focus, such as Africa, Latin America or China. Others may have specific criteria regarding the subject companies that are appropriate for their investment, such as companies whose shares trade on the OTC Bulletin Board, the New York Stock Exchange, NASDAQ, the American Stock Exchange or foreign stock exchanges. Others may have requirements as to a minimum share price, for example over $2, or companies that are cash flow positive. Recently, a growing number of traditional venture capital firms have made investments in PIPE transactions. Although many of these investments have been structured in a fairly straight-forward manner, it is not uncommon for venture capitalists to attempt to transpose to the PIPE arena the full-blown rights and protections that they typically seek with respect to private company preferred stock investments. Often, such 'venture capital PIPE' investments will raise a host of issues under the federal securities laws and corporate governance regulations. Varieties of PIPE's There are many varieties of PIPEs, which typically differ based on the structure and terms of the transaction, the securities offered, and the investor base to which it is offered or targeted. Pure PIPEs Compared to Standard PIPE's In a 'pure' PIPE, investors agree to purchase the company's securities in a private placement on the condition that a registration statement for the resale of those securities is declared effective by the SEC immediately after the closing of the private placement. The closing of the pure PIPE transaction, therefore, is delayed until the effective date of the registration statement, giving investors the immediate ability to resell the securities purchased in the PIPE. Today, due in large part to legal concerns created by the structure, this type of PIPE transaction is not utilized very often. In contrast, a 'standard' PIPE transaction is structured so that the private placement of the securities is closed not only prior to the effectiveness of the resale registration statement, but also prior to the filing of such registration statement with the SEC. The company agrees in the PIPE documents to file for the registration of such securities promptly following the closing (typically within ten days of the closing) and to use its best efforts to obtain effectiveness of the registration statement (generally within 30 days of the filing). However, depending on whether or not the SEC opts to review the registration statement, the resale registration process can take several months to complete. Due in large part to this period of illiquidity, investors typically purchase their PIPE securities at a discount to the public market price. Although various types of debt and equity securities, as well as more exotic securities such as derivatives, can be sold and registered with the SEC in a PIPE transaction, most PIPEs involve the issuance by the company of common stock, convertible preferred stock or convertible debt. As an inducement to complete the PIPE financing, investors also may require warrants as a 'sweetener.' Warrant terms vary widely, but typically include an exercise price set at a premium to the current market price. Traditional PIPE'S The majority of 'traditional' PIPEs involve the sale of common stock at a fixed price. The traditional PIPE can be priced at a discount from market, a premium to the market, or at the market price of the company's common stock. However, traditional PIPEs may instead consist of the sale of preferred stock which, at the investor's election, is convertible into common stock at a fixed conversion price. Such preferred stock may entitle the investors to dividends and other rights and in a sale, merger or liquidation of the company, will provide the investor with the right to receive back the purchase price of the preferred stock prior to any distributions to the holders of common stock. These benefits can be argued to off-set the illiquidity discount applicable to traditional common stock PIPEs, and therefore traditional preferred stock PIPEs are often priced at or near the current market price of the company's common stock. Structured PIPE'S In a "Structured' PIPE, the company will sell preferred stock or debt securities which, in either case, are convertible into the company's common stock. The conversion price in a structured PIPE, however, is either variable or contains a re-set mechanism that automatically adjusts the conversion price downwards (e.g., allows the investor to acquire more shares) if the market price of the company's common stock falls below the conversion or re-set price fixed at the time of issuance. Structured PIPEs provide price protection to investors but subject the company's common stockholders to the risk of significant dilution. Additionally, a structured PIPE transaction may require shareholder approval prior to the issuance of the PIPE securities. In 2001, according to industry surveys, approximately 23 per cent of all PIPE transactions (representing only ten per cent of dollars raised) were structured PIPEs. The PIPE Transaction Itself A significant advantage of PIPE transactions compared to traditional public offerings is that they can be completed rapidly - typically two to three weeks from kick-off to closing. In a typical PIPE transaction, due diligence is limited in scope because of the compressed time frame, and generally consists of a review of the company's filings with the SEC and press releases and investigative conference calls with the company's management, counsel and accountants. The documentation for a PIPE financing is relatively minimal: typically consisting of an offering circular summarizing the terms of the financing and containing a description of the business of the company taken directly from the company's filings with the SEC, a purchase agreement, a registration rights agreement, an investor questionnaire, a legal opinion from company counsel and, in the case of a convertible preferred stock offering, a certificate of designations or charter amendment defining the rights and privileges of the preferred stock. After the closing of the financing transaction, the company and its counsel typically prepare and file the registration statement to register for resale by the investors the common stock issued (or issuable on conversion of preferred stock or other securities issued) in the PIPE. Typically, the registration statement is filed within ten days after the closing, and the company is required to use its best efforts to have the SEC declare the registration statement effective within thirty days after the filing. The SEC may elect to review and comment on the registration statement, which could delay the effectiveness past this 30-day commitment. Once the SEC is satisfied with the registration statement, it will declare it effective and resales of the PIPE securities may begin. The company must keep the registration statement up to date during the entire time that PIPE investors are reselling their restricted securities pursuant to the registration statement. |