Private Investment in Public Equity (PIPE)

Over the past decade, PIPE transactions have gained tremendous popularity as a reliable source of financing for many OTC Bulletin Board Companies.

Due to the surge in size and type, PIPE Transactions have been heavily institutionalized in the past five years; the market for PIPEs has exploded. PIPE Industry conferences, newsletter and websites monitor the PIPE market. They profile PIPE market participants as well as the variety of PIPE structures and scenarios. Legal & Compliance, LLC has kept pace with this trend every step of the way.

A PIPE (Private Investment in Public Equity) refers to any private placement of securities of an already-public company that is made to selected accredited investors. Specifically, PIPE transactions are privately issued equity or equity-related securities that are sold to accredited investors under Regulation D by public companies. In a the standard PIPE transaction, accredited investors review and execute Purchase Agreement in which they agree to purchase securities in conjunction with the Issuer filing a Resale Registration Statement that discloses the details of the resale.

PIPE issuers range in size, but OTC Bulletin Board Companies find particular benefits to the PIPE. OTCBB Companies can raise anywhere from $1 million to in excess of $50 million, depending on the specific circumstance.
Accredited investors have exhibited increased interest in PIPE transactions, particularly in specific, recession resistant sectors such as healthcare, pharmaceuticals and certain sectors of telecommunications.

Primarily, PIPE transactions are most popular and equally effective as “second round financing.” These increasingly mainstream public equity vehicles encompass add-on equity offerings, secondary or follow-up offerings and 144A convertible securities. PIPE transactions can be underwritten with the assistance of an investment banker or broker dealer.

Unlike the standard public financing scenario, a PIPE transaction is marketed to a select group of accredited investors over a defined time period. In the case of a Secondary Offering for an OTC Bulletin Board Company, the PIPE is accompanied by Registration Statement that is filed with the SEC prior to being priced.

OTCBB Company Benefits

PIPE Transactions possess numerous benefits to the OTC Bulletin Board Company. Some of the highly attractive features include:

• Flexibility – PIPEs accommodate a more flexible transaction size than public alternatives
• Speed – PIPEs can be completed in a matter of weeks
• Inexpensive – Work best for a target market, reducing marketing time and expense
• Share Price Stability – PIPE’s provide superior confidentiality and eliminate share price declines that can be triggered by the filing of public offerings
• Improved Balance Sheet – They improves financial flexibility and balance sheet strength for OTCBB Companies
• Simplicity – PIPE’s require a comparatively minimal preparation process
• Liquidity – They increase a Company’s trading liquidity while diversifying the shareholder base

PIPE Variations

Regardless of size, OTC Bulletin Board Companies can take advantage of several types of PIPE Transactions. When considering the most beneficial PIPE, OTCBB’s must consider the structure and terms of the transaction, the securities offered, as well as the target investors.

Standard PIPEs and Pure PIPEs

A standard PIPE consists of a private placement of securities and is closed prior to the effective date and filing date of the Registration Statement being filed with the SEC. The Issuer agrees in the PIPE Registration Statement that it will be filed in a timely manner following the closing. Ten days is an acceptable time frame. The OTC Bulletin Board Company must also make every possible effort to ensure the Registration Statement is effective within 30 days of the filing date.

In contrast, pure PIPE investors purchase the Issuer’s securities in a private transaction (a private placement) predicated on the condition that a registration statement for the resale of said securities is deemed effective by the SEC immediately after the closing date. The closing date of this type of PIPE hinges on the effective date of the Registration Statement. Pure PIPE investors can immediately resell their securities. Recently, because of increasing regulatory concerns, pure PIPE’s are used less frequently.

The majority of PIPEs consist of the issuance by the Bulletin Board Company of common stock, convertible preferred stock and/or convertible debt. As an incentive to complete the PIPE transaction, investors may require warrants. Warrant terms typically include an exercise price set at a premium to the current market price.

Traditional PIPES

Most traditional PIPEs consist of the sale of common stock at a set price. The traditional PIPE is priced at a discount to the market, at a premium to the market, or at the market price of the OTCBB’s common stock. Traditional PIPEs may also involve the sale of convertible preferred series stock. This convertible preferred stock can be converted to common stock at a later date at the investor’s discretion at a pre-determined conversion price. Typically, holders of the convertible preferred series stock are superior in ranking to holders of the common stock in the event of a liquidation, merger or a bankruptcy.

Structured PIPES

Structured PIPE transactions consist of the sale of preferred series stock or debt instruments which are convertible into the OTCBB’s common stock. The conversion price is variable and/or contains a reset provision that automatically adjusts the conversion price downwards, allowing the investor to acquire more shares if the share price drops below market price at the time of issuance. Price protection is the key feature for Structured PIPEs but the shareholders of Company’s common stock can experience dilution.

In addition the above, PIPE transactions may be issued in a variety of forms, including registered common stock, unregistered common stock, convertible preferred stock, and convertible debt instruments.