PIPE Transactions

Private Investment in Public Equity

Over the past decade, PIPE transactions have gained tremendous popularity as a reliable source of financing for many over the counter traded companies. Over the counter traded companies include OTCQB, OTCQX and OTCBB. Although non-reporting pink sheet entities are also traded over the counter, they generally do not attract PIPE investors, for several reasons, including issues with using Rule 144 as a re-sale mechanism.

Due to the surge in size and type, PIPE Transactions have been heavily institutionalized in the past years; the market for PIPEs has exploded. 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 in an already-public company that is made to selected accredited investors. Specifically, PIPE transactions are privately placed and issued equity or equity-related securities that are sold to accredited investors under an exemption to registration (usually Rule 506(b) or Section 4(a)(2)) by public companies.

OTCQB, OTCQX and OTCBB Company Benefits

PIPE Transactions provide numerous benefits to OTCQB, OTCQX and OTCBB traded companies. 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 – costs generally include legal and accounting
• Simplicity – PIPE’s require a comparatively minimal preparation process
• Liquidity – increase a Company’s trading liquidity while diversifying the shareholder base

PIPE Variations

Regardless of size, OTCQB, OTCQX and OTCBB Companies can take advantage of several types of PIPE Transactions. When considering the most beneficial PIPE, OTCQB, OTCQX and OTCBB companies 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. Generally the transaction closes either prior to or upon effectiveness of a resale registration statement. The Issuer agrees that a resale registration statement will be filed in a timely manner following the closing, usually between 10 and 30 days. The OTCQB, OTCQX or OTCBB Company must also make every possible effort to ensure the registration statement goes effective. However, since the 2008 amendments to Rule 144, many PIPE investors are willing to hold for the six month holding period for reporting entities.In contrast, pure PIPE investors’ purchase the Issuer’s securities in a private placement transaction predicated on the condition that a registration statement for the resale of said securities is deemed effective by the SEC. The closing date of this type of PIPE hinges on the effective date of the Registration Statement.

The majority of PIPEs consist of the issuance by the OTCQB, OTCQX or OTCBB Company of common stock, convertible preferred stock and/or convertible debt.
Structured PIPES

Structured PIPE transactions consist of the sale of convertible preferred stock or debt instruments which are convertible into the OTCQB, OTCQX or OTCBB’s company common stock. The conversion price is generally variable based on a discount to market price at the time of conversion.
Registered Direct Common Stock

Common stock is issued as a Regulation D private placement in tandem with an agreement to register the shares immediately after the transaction concludes. Investors are equipped with the power to accumulate a position in a specific security. The Issuer can deftly access the equity market. A discount is built into the pricing to compensate the investor for liquidity restrictions.

Convertible Preferred/ Convertible Debt

Equity-linked security structured as preferred stock or debt. The security is issued as a private placement with an agreement to register the underlying shares as soon as possible after the transaction closes. Provides an investor with a senior position relative to the common shareholders as well as current income in the form of a dividend or coupon. Provides an issuer with broad flexibility with regard to structure and the ability to issue stock at a premium to a straight common stock alternative. Issuers should understand that convertible transactions tend to cause “overhang” in the market, i.e., the downward pressure on stock prices due to the existence of a sizeable block of securities that will be released into the market. Depending on the structure, consideration should also be given to rating agency treatment and senior debt covenants, if applicable.