PIPE Investments

Selling and purchasing investments, even as a well-established business owner, can be an intimidating thing. In simple terms, an investment is just money invested to make a profit, either monetary or material.

However, there are so many types of investments: stocks, bonds, annuities. To make sure one is making the right decision, as a company leader or an investor, you should always understand the ins and outs of any specific investment.

What is a PIPE investment?

PIPE is an acronym that stands for Private Investment in Public Equity. A PIPE investment is the purchasing of shares of publicly traded stocks with a price that is below the average market value. Some of these PIPE purchases that frequently take place are pension funds and hedge funds.

What is the purpose of a PIPE?

This avenue of selling and buying stock allows the company who issued the stock to raise funds for their public business. This type of investment is a more efficient form of financing, due to the limited federal restrictions.

How does it work?

To put it simply, a PIPE investment occurs by a publicly traded company using these acquired funds to put into unavoidable responsibilities such as regular expenses and expandatory expenses.

When these investments occur, to assist the public company in ensuring their necessary needs are met, investors agree to purchase a specific number of restricted shares, for a set price, from this public company. In exchange, this company files a Resale Registration Statement for the investors to resell their shares in a public forum.

PIPE Investments

Who could use these investments?

While in recent years, well-established and successful companies have taken part in PIPE investment agreements, they’re generally issued by small to medium sized businesses that probably have a hard time accessing traditional financing options. Larger businesses tend to use PIPE investments as a way to liquidate already existing stockholdings without using traditional forms of financing such as shelf takedowns.

What investors participate in PIPE transactions?

One of the down sides of going the PIPE transaction route, as opposed to a traditional transaction or because traditional forms of financing are out of reach, is that only accredited investors can partake.

What are the disadvantages?

  • PIPE Investments Risk of minimal share value: Investors can sell their share after a small time, reducing market price.
  • PIPE Investments Investors will expect a discount on the purchase price, due to the initial resale restrictions.
  • PIPE Investments Limitation of investors (as explained above)
  • PIPE Investments “Blackout periods” (which you will learn about below) are limited during the time the resale registration statement is in effect.
  • PIPE Investments There are some “rules” that set certain limitations

What are “blackout periods?”

During the agreed upon times in which a resale registration statement is in effect, in which securities can be sold without restriction, the issuer may suspect this agreed upon statement to either amend it or fix some material within. With this statement suspended, purchasers of these PIPE investments will be less likely to sell their stock without the security of the statement in place. These periods can be negotiated and limited at the time of agreement.

What is the reputation of PIPEs?

There is a misconception about the negative impact of PIPE investments because of bad press it has received. However, in recent years these types of investments have grown in popularity, increasing the likelihood of an investor purchasing a share. While there is some risk, which comes with all types of financing and exchange of stocks, it is still an avenue for those business who don’t, or can’t, utilize other types of funding.

How do you decide if a PIPE investment is right for your company?

There is no doubt that this is the most critical question to ask, once you’re familiar with PIPE investments. Though there are many advantages and disadvantages to these types of financial agreements, in the end it’s up to the company to decide if this is the choice that is best for the funding needs of their business. With the tumultuous market of today, in the world of the COVID-19 pandemic, some companies may need more accessible options that require less restrictions.