Private Offerings – PIPEs

By Dennis McCarthy – (213) 222-8260 –

Welcome to the Equity Series – Raising Equity for Small Cap Public Companies

This particular video addresses another means for a company to raise equity through a private offering, what’s commonly known as a “PIPE” offering.

In contrast with most of the other videos in this series which describe various means to use a shelf registration, a PIPE does not require a company to have an effective shelf registration. 

In fact, a PIPE offering may take many forms: stock, convertible securities, debt with warrants. It’s a catchall name for an offering not using a shelf registration.

So, for companies that don’t want to or can’t file a shelf registration, a PIPE may be the mechanism of choice. 

Briefly why wouldn’t a company be able to use a shelf registration?  I go into this in more detail in my video “Shelf Registration”, but in short, a company whose stock is not traded on one of the exchanges or NASDAQ, can’t use a shelf.  Similarly, a company that has not filed its 10K or 10Q on time, can’t use a shelf. 

Also, a company that wanted to raise equity but didn’t plan ahead to have an effective shelf registration might use a PIPE.

A couple years ago, before the rules for shelf registrations were revised to permit widespread use by small cap public companies, PIPEs were a very commonly used form of offering.

There developed a large universe of investors familiar with and willing to invest in this form of offering.  This universe of PIPE investors, however, is still much smaller than the universe of potential investors in registered offerings.

In a PIPE offering, a company’s broker-dealer quietly approaches potential PIPE investors and obtains their agreement to refrain from trading in the stock or disclosing to others that a PIPE offering is underway.  This is known as bringing them over the wall.

Once over the wall, a potential PIPE investor can conduct an evaluation of the offering company and negotiate terms of the offering. 

PIPEs are often priced at a discount to the market and may also include warrants to give PIPE investors an extra incentive to make the investment given that the securities purchased aren’t registered.

Today, the rules for when securities sold in private sales become publicly tradable have become more favorable but there’s still at least several months.  The details of this topic are beyond scope of this particular video.  Maybe one of my legal colleagues will weigh in on this topic.

Also, on the issue of pricing, theoretically, raising a PIPE shouldn’t trigger short selling in an offering company’s stock but there is the risk that word leaks out to Wall Street.  It is possible, therefore, that the PIPE pricing will include both the PIPE investor’s discount from the market price and also the impact of Wall Street shorting, a double whammy.

 In the early days of PIPE financing, some PIPEs had terms that required a company to issue more shares to the investor if the company’s stock price dropped below some threshold. This structure, now uncommon, came to be known as a “toxic” or “death spiral” securities.  You get the idea.

It’s no surprise then that companies now more commonly use registered offerings if that form is available to the company than PIPEs.

Please contact me to help your company to raise equity or to complete other capital market transactions. 

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