Series 82: 1.1.2.7. Private Investment In Public Equity (PIPE) Transactions

Taken from our Series 82 Top-off Online Guide

1.1.2.7.  Private Investment in Public Equity (PIPE) Transactions

A public offering can be risky for a company whose new issue might dilute the value of its existing stock. In addition, public offerings can be expensive and time consuming for management.

In the 1990s, the SEC created a way for publicly traded companies to raise money without going through a public offering. This financing technique allowed already public companies to sell private placements to accredited investors. These kinds of private placements are referred to as private investment in public equity (PIPE) transactions. A PIPE is typically carried out under Regulation D, Rule 506(b), meaning that it cannot be publicly advertised and all but 35 of the investors must be accredited.

In a PIPE, an issuer sells common stock to accredited investors in a private placement. PIPE transactions come in several types. In one type, common stock is sold at a discount to the market price. Under a second type, the issuer sells stock at a discount to current market prices along with warrants. The warrants, usually having a five-year term, enabling the holder to purchase additional shares at a price equal to or above current market prices. PIPE investments are not designed to provide near-term income to the investor.

Since the shares sold in PIPE are privately placed, the shares are “restricted” securities, not freely tradable in the open market. Because of this, the issuer files a registration statement with the SEC shortly after closing the issue to provide for the resale of the shares. While the SEC is reviewing the resale registration statement, investors will hold restricted shares. Once the registration statement is declar

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