What Is a Privat🉐e Investment in Pu🐽blic 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 澳洲幸运5官方开奖结果体彩网:secondary offerings because they offer fewer regulatory hurdles with the Securities and Exchange Commission (SEC). On the dow🍒nside, PIPEs tend to be an expensive source of capital since the issuer must take a discount on the stocks sold.

How a Private Investment in Public Equity Works

A publicly-traded company may utilize a PIPE when securing funds for 澳洲幸运5官方开奖结果体彩网:working capital to fund day-to-day operations, expansion, or 澳洲幸运5官方开奖结果体彩网:acquisitions. The company may create new stock shares or use some from its supply, but the equities never go on sale on a stock exchange.

Instead, these large investors purchase the company's stock in a 澳洲幸运5官方开奖结果体彩网:private placement, and the issuer fi෴les a resale registration statement with the SEC.

The issuing business typically obtains its funding—that is, the investors' money for the shares—within two to three weeks, rather than waiting several months or longer, as it would with a secondary stock offering. Registration of the new shares with the SEC typically becomes effective within a month of filing.

Special Considerations for PIPE Buyers

PIPE investors may purchase stock below the market price as a hedge of protection against the share price going down after news of the PIPE gets out. The discount also acts as compensation for a certain lack of 澳洲幸运5官方开奖结果体彩网:liquidity in the♛ sh𝐆ares, meaning there can be delays in selling or converting the shares to cash.

Since this offering was a PIPE, the buyers cannot sell their shares until the company files its resale registration statement with the SEC. However, an issuer generally cannot sell more thaꦇn 20% of its outstanding stock at a discount without receiving prior approval from current shareholders.

A traditional PIPE agreement lets investors purchase 澳洲幸运5官方开奖结果体彩网:common stock or 澳洲幸运5官方开奖结果体彩网:preferred stock that is convertible to common shares at a predetermined price or exchange ꧅rate. If the business is merged with another or sold soon, investors may be able to receive dividends or other payoffs. Dividends are cash or stock payments from companies to their shareholders or investors. Because of these benefits, traditional PIPEs are typically priced at or near the stock’s market value.

With a structured PIPE, preferred stock or debt securities convertible to common stock are sold. If the securities contain a reset clause, new investors are shielded from downside risks, but existing stockholders are exposed to the greater risk of dilution in share values. For this reason, a structured PIPE transaction may n♔eed prior stockholder approval.

Advantages and Disadvantages of PIPEs

Private investment in public equity carries several advantages for issuers. Large amounts of shares are typically sold to knowledgeable investors over the long term, ensuring the company secures the funding it needs. PIPEs can be particularly advantageous for small-to-medium-sized public companies that may have a hard time accessing 澳ᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚ洲幸运5官方开奖结果体彩网:more traditional forms of equity fওinancing.

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

However, on the downside, investors may sell their stock in a short amount of time, driving 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 shareholders’ investments, which can lead to a lower stock price.

澳洲幸运5官方开奖结果体彩网:Short sellers may take advantage of the situation by repeatedly selling their shares and lowering the share price, potentially resulting in PIPEꦏ investors having majority ownership of the company. Setting a minimum share price below which no compensatory stock is issued can avoid this problem.

Example of a PIPE

In Aug. 2023, the aircraft manufacturer Archer Aviation closed a $215 million investment round that included a PIPE financing agreement. Investors included United Airlines, ARK Invest, the auto manufacturer Stellantis, and Boeing.

The oversubscribed offering allowed Archer to raise an additional $215 million in capital, in exchange for equity sales to the investors. The raised money will be used as working capital and for general corporate expenses in the company's goal of testing and building new passenger aircraft. For the investing companies, the deal allowed them to increase their stakes in the company and develop closer cooperation with a potential supplier.

The Bottom Line

A private investment in public equity (PIPE) is a transaction where companies sell shares in return for capital from a major investor. Although the issuing company is already listed in the stock market, selling equity through a PIPE can be faster and more efficient than selling their shares to the public. On the downside, the issuer must accept a discount from the market price.