Private Investment in Public Equity (PIPE)

What Is a Private Investment in Public Equity (PIPE)?

Private investment in public equity (PIPE) is the buying of shares of publicly traded stock at a price below the current market value (CMV) per share. This buying method is a practice of investment firms, mutual funds, and other large, accredited investors. A traditional PIPE is one in which common or preferred stock is issued at a set price to the investor, while a structured PIPE issues common or preferred shares of convertible debt.

The purpose of a PIPE is for the issuer of the stock to raise capital for the public company. This financing technique is more efficient than secondary offerings due to less regulatory issues with the Securities and Exchange Commission (SEC).

How a Private Investment in Public Equity Works

A publicly-traded company might use a PIPE while securing funds for working capital to fund everyday operations, expansion, or acquisitions. The company might make new stock shares or utilize some from its supply, yet the values never go on sale on a stock exchange.

All things considered, these large investors purchase the company's stock in a private placement, and the issuer records a resale registration statement with the SEC.

The responsible business commonly gets its funding — that is, the investors' money for the shares — inside a little while, as opposed to waiting several months or longer, as it would with a secondary stock offering. Registration of the new shares with the SEC normally becomes effective in the span of a month of filing.

Special Considerations for PIPE Buyers

PIPE investors might purchase stock below the market price as a hedge of protection against the share price going down after insight about the PIPE gets out. The discount likewise acts as compensation for a certain lack of liquidity in the shares, significance there can be postpones in selling or switching the shares over completely to cash.

Since this offering was a PIPE, the purchasers can't sell their shares until the company records its resale registration statement with the SEC. Nonetheless, an issuer generally can't sell over 20% of its outstanding stock at a discount without getting prior endorsement from current shareholders.

A traditional PIPE agreement allows investors to purchase common stock or preferred stock that is convertible to common shares at a predetermined price or exchange rate. Assuming the business is merged with another or sold soon, investors might have the option to receive dividends or different adjustments. Dividends are cash or stock payments from companies to their shareholders or investors. As a result of these benefits, traditional PIPEs are normally priced at or close to the stock's market value.

With a structured PIPE, preferred stock or debt securities convertible to common stock are sold. On the off chance that the securities contain a reset clause, new investors are protected from downside risks, yet existing stockholders are presented to the greater risk of dilution in share values. Therefore, a structured PIPE transaction might require prior stockholder endorsement.

Advantages and Disadvantages of PIPEs

Private investment in public equity conveys several advantages for issuers. Large amounts of shares are commonly sold to knowledgeable investors over the long term, guaranteeing the company secures the funding it needs. PIPEs can be especially advantageous for little to-medium-sized public companies that might struggle with getting to additional traditional forms of equity financing.

Since PIPE shares needn't bother with to be registered in advance with the SEC or meet all the standard federal registration requirements for public stock offerings, transactions continue all the more efficiently with less administrative requirements.

In any case, on the downside, investors might sell their stock in a short amount of time, driving down the market price. In the event that the market price dips under a set threshold, the company might need to issue extra stock at an essentially scaled down price. This new share issue weakens the value of shareholders' investments, which can lead to a lower stock price.

Short sellers may exploit the situation by more than once selling their shares and bringing down the share price, possibly bringing about PIPE investors having majority ownership of the company. Setting a base share price below which no compensatory stock is issued can keep away from this problem.

In February 2018, Yum! Brands(YUM), the owner of Taco Bell and KFC, announced it was purchasing $200 million of takeout company GrubHub's stock through a PIPE. In this case, Yum! drove the PIPE to fashion a more grounded partnership between the two companies to increase sales at its caf\u00e9s through pickups and delivery.

The additional liquidity permitted GrubHub to become its U.S. delivery network and to make a more consistent ordering experience for customers of the two companies. GrubHub likewise expanded its board of directors from nine to 10, adding a representative from Yum!

Features

• The discounted price of PIPE shares means less capital for the company, and their issuance effectively weakens the current stockholders' stake.
• Since they have less rigid regulatory requirements than public offerings, PIPEs set aside companies time and cash and raise funds all the more rapidly.
• Private investment in public equity (PIPE) is the point at which an institutional or an accredited investor purchases stock straightforwardly from a public company below market price.