Consideration Regarding
PIPE Financing
The information
contained in this article is intended for informational purposes only
and should not be construed as legal advice or a substitution for obtaining
legal advice from an attorney. Reading this article is not intended
to create an attorney-client relationship. For personal legal advice,
please consult an attorney of your choice. Because of the possible unanticipated
changes in industry regulations and applicable state and federal laws,
the authors and creators and any and all persons or entities involved
in any way in the preparation of this article disclaim all responsibility
for the legal effects or consequences of the interpretation of the information
provided.
A PIPE (Private
Investment into Public Entity) refers to any private placement of securities
of an already-public company that is made to selected accredited investors
who enter into a purchase agreement committing them to purchase securities
and, usually, requiring the issuer to file a resale registration statement
covering the resale of the securities. Equity lines of credit, are not
PIPE transactions.
PIPE transactions
may involve the sale of common stock, convertible preferred stock, convertible
debentures, warrants, or other equity or equity-like securities of an
already-public company.
What are some
of the advantages of a PIPE transaction?
A PIPE transaction
offers several significant advantages for an issuer, including:
- lowering
transaction expenses;
- expanding
institutional and accredited investor holdings;
- for fixed
price transactions, reducing the incentive for investors to hedge
their commitment by shorting the issuer's stock;
- requiring
disclosure of the transaction to the public only after definitive
purchase commitments are received from investors;
- requiring
preparation by the Issuer only of very streamlined information,
including publicly filed Exchange Act reports; and
- enabling a
transaction to close and fund within seven to ten days of receiving
definitive purchase commitments.
How do traditional
PIPE transactions differ from non-traditional PIPE transactions?
In a traditional
PIPE transaction, the investor bears the price risk from the time
of pricing until the time of closing. The issuer is not obligated
to deliver additional securities to the PIPE investors in the event
of fluctuations in stock price or otherwise. Investors enter into
a definitive purchase agreement with the company in which they commit
to purchase securities at a fixed purchase price. Investors do not
fund at the time of entering into the purchase agreement. Instead,
the company then files a resale registration statement covering the
resale of those securities by the PIPE investors. The transaction
closes once the SEC has indicated its preparedness to declare effective
the resale registration statement. Consequently, the traditional PIPE
investors have available a resale registration statement at the time
of closing.
Non-traditional
PIPE transactions generally are structured as private placements with
follow-on (or trailing) registration rights. This means that once
investors enter into a definitive purchase agreement, a closing is
scheduled. Investors fund and the transaction closes. Post-closing,
the company has an obligation to file a resale registration statement
and use its best efforts to have it declared effective.
At the closing
of a traditional PIPE transaction, purchasers receive legended securities.
What are the
benefits of traditional PIPE transactions compared to non-traditional
PIPE transactions?
A traditional
PIPE reduces uncertainty, market risk, and illiquidity compared to
a private placement PIPE.
Purchasers in
a traditional PIPE are not required to close until a resale registration
statement is available for subsequent sales of the shares purchased
in the PIPE transaction. Traditional PIPE purchasers are able to obtain
unlegended shares shortly after, or at, closing, allowing purchasers
flexibility in disposing of the shares.
For most registered
investment funds, securities purchased in a traditional PIPE are counted
in the funds' public basket. This broadens the scope of potential
investors for traditional PIPEs and also generally justifies better
pricing.
How is a price
set?
The price is
set through discussions between the placement agent and the issuer,
as it is during the course of an underwritten (firm commitment) offering
or directly between the purchaser and the issuer.
Typically, PIPEs
are priced at a modest discount to the closing bid price for the stock.
Often, in variable/reset transactions, the price is set based on a
formula that relates to the average closing price of the stock over
the several days preceding the pricing.
Who bears price
risk?
In a fixed price
transaction, the purchaser bears the price risk during the period
from execution of the purchase agreement until the closing. In a variable/reset
price transaction, the price risk is shared between the investor and
the company. Usually, the investor will negotiate some price protection
for itself.
What Items are
subject to negotiation?
In addition to
negotiating specific carve outs for representations and warranties,
the placement agent, purchaser, and issuer typically negotiate the
following points:
- whether issuer's
counsel will be prepared to include a 10b-5 negative assurance in
it opinion;
- · whether
the issuer will be required to cause its independent auditor to furnish
the placement agent (if any) with a comfort letter at closing;
- · whether
there will be a limitation on the length of black-out periods;
- · whether
there will be penalty payments;
- · the
length of time given to the issuer to have the resale registration
declared effective (most often 90 days); and
- · whether
there will be a time limit for filing of the resale registration statement
following execution of the purchase agreements.
What are an
issuer's typical considerations relating to a PIPE transaction?
- usually the
issuer cannot issue more than 20% of outstanding stock in the PIPE
transaction without shareholder approval and prior notification to
exchanges;
- the purchaser
(not the issuer) bears market risk;
- a short timetable
provided there is no SEC review;
- the format is
familiar to sophisticated institutional investors;
- PIPEs typically
involve a modest discount to market price;
- the SEC is comfortable
with the PIPE format; and
- PIPEs do not
have any of the negative effects associated with a "death spiral"
preferred or an equity line of credit (discussed below).
Does a PIPE
transaction require any prior approvals from regulatory agencies or
self-regulatory organizations?
A PIPE transaction
may require prior approval from the exchange on which the issuer's
common stock is quoted if the transaction will be completed at a discount
and may result in the issuance of 20% or more of the issuer's outstanding
capital stock. The company should consider not only the effect of
completing the proposed PIPE transaction, but also, if it has completed
other private transactions within the same six month period, the aggregate
effect of such transactions, all of which may be integrated. Each
of the New York Stock Exchange, the American Stock Exchange, and NASDAQ
has a similar requirement requiring the company to obtain shareholder
approval if the transaction meets certain criteria.
How does an
issuer ensure that it has complied with Regulation FD in the context
of conducting a PIPE transaction?
An issuer is
owed a duty of confidence from its agents, such as its placement agent,
accountants, and other similar participants in the PIPE process. Generally,
an issuer does not share with potential investors any information
that has not already been included in the issuer's Exchange Act reports.
A private placement
memorandum for a PIPE transaction usually contains the issuer's Exchange
Act reports, together with legal disclaimers. It is prudent to limit
the information contained in the private placement memorandum unless
the issuer will be receiving signed confidentiality agreements. Although
the issuer is not sharing material nonpublic information about the
issuer's business with potential PIPE investors, the issuer is sharing
its plans concerning a potential financing transaction. The fact that
the issuer is contemplating a PIPE transaction may itself constitute
material nonpublic information.
The issuer should
ensure that, before the placement agent reveals the issuer's name,
the placement agent obtains an agreement from each potential purchaser
it contacts that information shared will be kept confidential. An
oral agreement may be documented subsequently through an acknowledgement
and a covenant in the purchase agreement.
Laura Anthony
is the founding partner of Legal & Compliance, LLC, a corporate
and securities law firm specializing in securities & regulatory
matters, business transactions, commercial litigation and entity formation.
She is also a member the NASD Dispute Resolution Board of Arbitrators
and can be reached at 800-341-2684; by e-mail at LauraAnthonyPA@aol.com
or contacted through the company’s web sites http://www.LegalAndCompliance.com
and http://www.MyWebLawyer.com.
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