What Is a Private Investment in Public Equity (PIPE)?

What Is a Private Investment in Public Equity (PIPE)?

Let me explain what a Private Investment in Public Equity, or PIPE, really is. It's when institutional or accredited investors buy shares straight from public companies, giving those companies a quicker way to raise capital than going through secondary offerings. You see, companies get the benefit of fewer regulatory obstacles, but they have to sell those shares at a discount, which affects the overall share value and can dilute the equity of existing shareholders.

Key Takeaways

Here's what you need to know about PIPE: it's where accredited investors purchase stock directly from a public company at a price below the current market value. These agreements are popular because they let companies raise capital efficiently and skip many of the regulatory hurdles that come with public offerings. That said, while investors get discounted prices, this can dilute the stakes of existing shareholders and might even require their approval beforehand. You'll find traditional PIPEs dealing with common or preferred stock, whereas structured ones might involve convertible debt. Investors gain from the discounts, but they have to deal with potential delays in turning those shares into cash and limits on reselling them right away.

How PIPE Transactions are Executed

When a publicly traded company needs funds for working capital, daily operations, expansion, or acquisitions, they might turn to a PIPE. They can issue new stock shares or pull from their existing supply, but these shares don't hit the stock exchange for sale. Instead, large investors buy them through a private placement, and then the company files a resale registration statement with the SEC. This way, the company gets the investors' money—essentially the payment for the shares—within two to three weeks, much faster than the months it could take with a secondary stock offering. The registration of those new shares with the SEC usually becomes effective about a month after filing.

Key Considerations for Investors in PIPE Deals

If you're an investor looking at PIPE deals, you might buy stock below market price as a safeguard against the share price dropping once the PIPE news breaks. That discount also compensates for the lack of liquidity, meaning there could be delays in selling or converting those shares to cash. Since it's a PIPE, you can't sell your shares until the company files that resale registration with the SEC. Keep in mind, an issuer generally can't sell more than 20% of its outstanding stock at a discount without getting approval from current shareholders first.

In a traditional PIPE, you can purchase common stock or preferred stock that's convertible to common shares at a set price or exchange rate. If the company merges or gets sold soon after, you might receive dividends or other payoffs—those are cash or stock payments from the company to shareholders. Because of these perks, traditional PIPEs are usually priced at or near the market value. On the other hand, a structured PIPE involves selling preferred stock or convertible debt securities. If there's a reset clause, it protects new investors from downside risks, but it exposes existing stockholders to more dilution. That's why structured PIPEs often need prior stockholder approval.

Important Note on Discounts

Companies have to sell their shares at a discount in PIPE deals, meaning they go for less than the market price. In 2023, the average discount on these offerings was around 5%.

Assessing the Pros and Cons of PIPE Investments

PIPE investments come with clear advantages for the issuing companies. They sell large amounts of shares to knowledgeable, long-term investors, securing the funding they need. This is especially helpful for small-to-medium-sized public companies that struggle with traditional equity financing. Since PIPE shares don't require advance SEC registration or the usual federal requirements, the transactions are quicker and less cumbersome.

However, there's a downside: investors might dump their stock quickly, driving down the market price. If the price falls below a certain point, the company could have to issue more stock at an even lower price, which dilutes shareholder value and might drop the stock price further. Short sellers could take advantage by selling shares often, potentially lowering the price and letting PIPE investors gain majority ownership. To prevent this, setting a minimum share price where no additional compensatory stock is issued can help.

Real-World Example of PIPE in Action

Take August 2023, when aircraft manufacturer Archer Aviation closed a $215 million investment round that included a PIPE financing agreement. Investors like United Airlines, ARK Invest, Stellantis, and Boeing participated. This oversubscribed offering let Archer raise that additional $215 million by selling equity to these investors. The funds are set for working capital and general corporate expenses as they work on testing and building new passenger aircraft. For the investors, it meant increasing their stakes and building closer ties with a potential supplier.

What's the Difference Between an IPO and a PIPE?

An IPO is the first time a company's securities are sold on a public stock market. With a PIPE, the stock is already trading publicly, but private equity investors strike a deal to buy it at a discount directly from the issuer. Even though the price is below market, PIPEs are faster than public offerings and face fewer regulatory hurdles.

What's the Difference Between a PIPE and a Private Placement?

A private placement involves selling shares to a small group of pre-selected buyers, not on a public market—common for smaller or privately held companies that don't qualify for public offerings. A PIPE is a form of private placement, but it's for companies that already trade on a public exchange. To make it work, issuers sell shares below market price, but it's often more straightforward than a full public offering.

What Is a Subscription Agreement in Finance?

In finance, a subscription agreement is where an investor commits to buying shares in a limited partnership. You agree to purchase shares in a company in exchange for a portion of its equity. The agreement covers the sale's time and date, the price and number of shares, plus any extra terms or conditions for backing out.

The Bottom Line

To wrap this up, PIPE lets publicly traded companies raise capital fast by selling shares directly to large, accredited investors at below-market prices. It's more efficient than secondary offerings with fewer regulatory issues. This approach helps companies get quick funds for operations, expansion, or acquisitions, but it can dilute existing shareholders' value. The discounts incentivize investors, though they mean less capital per share for the company. Overall, PIPEs are a smart option for companies needing speedy funding, especially smaller ones that hit roadblocks with traditional methods.