What is a PIPE Deal?

A PIPE, or private investment in public equity, refers to the private placement of securities of an already publicly listed company made to selected, accredited institutional investors. Transactions may involve the sale of different asset classes, including common stock, convertible preferred stock, convertible debentures, warrants, or other equity or equity-like securities of an already-public company.

How PIPE Deals Work

A publicly listed company may utilize a PIPE when securing funds for working capital to fund day-to-day operations, expansion, or acquisitions. The company may create new stock shares or use some from its supply. However, as its name implies, the stock shares are not purchased via a public stock exchange. Instead, these large institutional investors, such as hedge funds, purchase the company’s stock in a private placement, and the company selling its stock simply files a resale registration statement with the U.S. Securities and Exchange Commission (SEC).

Timing can be fast: The company issuing its shares to the investors can receive funds within two to three weeks. This is preferable to the longer wait times of several months, required for other types of financing, such as a secondary stock offering. Registration of the new shares with the SEC typically becomes effective within a month of filing.

What Are Some Types of PIPE Transactions? 

According to the SEC, several asset classes can be included in a PIPE, including the following:

  • Common stock at a fixed price 
  • Common stock at a fixed price, together with fixed price warrants 
  • Common stock at a fixed price, together with resettable or variable priced warrants 
  • Common stock at a variable price 
  • Convertible preferred stock or convertible debt, and 
  • A venture-style private placement for an already public company 

What Types of Companies Consider PIPE Deals?

Historically,  transactions have been used by issuers who had significant capital or liquidity requirements, including life science and biotech companies, real estate investment trusts, and technology companies. 

Not only do these types of companies carry high capital requirements, but their financing time frames are also usually abbreviated. They often need to spend large amounts of capital quickly, for example, to acquire intellectual property (IP) or to conduct clinical trials, as is the case with life science and biotech companies, or to purchase assets with fluctuating prices, as is the case with real estate investment trusts.

In recent years, as the volume of interest in this type of transaction has increased, the variety of issuers coming to market with transactions has also increased. 

For the issuer, a PIPE transaction usually includes the following considerations: 

  • Usually the issuer cannot issue more than 20% of outstanding stock in the  transaction without shareholder approval and prior notification to the public exchanges.
  • The purchaser — not the issuer — bears the market risk. 
  • A shorter timetable for review is required.
  • A modest discount to market price is offered.

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Advantages of a PIPE Deals 

PIPEs carry several advantages for issuers. Large numbers of shares are typically sold to an experienced, sophisticated institutional investor over the long term, ensuring the company secures the funding it needs. PIPEs can also be particularly advantageous for smaller companies and medium-sized public companies that may have a hard time accessing more traditional forms of equity financing.

Because PIPE shares do not need to be registered in advance with the SEC or meet all the usual federal registration requirements for public stock offerings, transactions proceed more efficiently with fewer administrative requirements.

The advantages of a PIPE transaction include: 

  • Lowered transaction expenses
  • Expanded holdings by institutional and accredited investors, who tend to invest for the longer term 
  • Disclosure of the transaction to the public required only after definitive purchase commitments are received from investors
  • Less paperwork, requiring preparation by the PIPE investor only of very streamlined information
  • Fast close, enabling a transaction to close and fund within seven to ten days of receiving definitive purchase commitments

Disadvantages PIPE Transaction

If investors can purchase shares of a public company quickly, they can also do the opposite and sell their stock in a short amount of time. This is one of the biggest downsides of a PIPE transaction, as a fast sell can drive down the market price.

If the market price drops below a set threshold, the company may have to issue additional stock at a significantly reduced price. This new share issue dilutes the value of existing shareholders’ investments, which can lead to a lower stock price.

Further, short sellers may take advantage of the situation by repeatedly selling their shares and lowering the share price, potentially resulting in PIPE investors having majority ownership of the company. To avoid this situation, issuers can set a minimum share price below which no compensatory stock is issued in order to avoid this problem.

The disadvantages of a PIPE transaction include the following:

  • Diluted share value for current stockholders
  • Buyers are limited to an accredited investor (no retail investor)
  • A discounted share price means less capital for the issuing company
  • Potential need for shareholder approval

What Are Some Alternatives to a PIPE Deal?

The alternative to a PIPE investment would be the traditional follow-on offering by a company. However, there is a lot more paperwork and filing requirements in the traditional issuing process. Another alternative for a company seeking fast working capital would be to simply increase its lines of credit through its existing banking relationships.

How Companies Can Prepare for a PIPE Deal

Though their paperwork is known to be less than that of a traditional offering, PIPE deals can still be complex and require a document hosting and access management service to support the transaction. Having a trusted virtual data room (VDR) partner is critical to ensuring that the deal closes — even if transaction times are shorter than a traditional IPO or M&A transaction

A world-class VDR like Caplinked can ensure that highly sensitive documents can be shared securely across any platform and any device. This is key to help mitigate some of the bottlenecks that can arise throughout the life cycle of a deal, especially during due diligence. Start your free trial today to see how CapLinked can help streamline all aspects of the mergers and acquisitions process.

Jake Wengroff writes about technology and financial services. A former technology reporter for CBS Radio, he covers such topics as security, mobility, e-commerce and the Internet of Things.


Investopedia – Private Investment in Public Equity (PIPE)

U.S. Securities and Exchange Commission (SEC) – Frequently Asked Questions about PIPEs