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Why would a public company do a PIPE? a private investment in public equities

Small and mid-size public companies often use PIPE financing because they can obtain capital from a PIPE transaction faster and cheaper than in a public offering..

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PRLog (Press Release) - Oct. 14, 2007 - A private placement is a private sale of unregistered securities by a public company to a select group of individuals or institutions. Because the securities sold in a private placement are not registered, they cannot be re-sold into the public market until a registration statement (Form S-1, SB-2, or S-3) has been filed and declared effective. To compensate for the inability to sell the securities immediately, private placement securities are often issued at a discount or are structured to provide the investors certain protections against decreases in the common stock price.
What is the PIPE Market?PIPE stands for Private Investment in Public Equities. PIPE transactions are also referred to as private placements or direct placements in public companies. PIPE transactions are privately negotiated sales of companies’ securities to individual accredited investors or institutional funds. Small and mid-size public companies often use PIPE financing because they can obtain capital from a PIPE transaction faster and cheaper than in a public offering.
What is the difference between PIPEs, 144-A and Reg S?Private placements are divided into three categories or legal structures: PIPEs, 144-A Convertible Transactions, and Reg S transactions. Most of the transactions we fund are PIPEs (Private Investments in Public Entities). For our purposes, we consider PIPEs as any type of Reg D Offering, Shelf Sale, or Equity Line Arrangement. Reg D is an SEC Rule that allows public companies to issue stock privately to a group of accredited investors without the need for public registration prior to the sale. Shelf Sales and Equity Line Arrangements actually require a registration statement to be effective prior to the sale of the stock, technically making them public offerings. We track them as PIPEs because these structures emerged as on offshoot from the PIPE market. 144-A transactions are private convertible debt or convertible equity offerings that allow the investors to resell their securities to other Qualified Institutional Buyers (QIB’s) without registration. Normally 144-A transactions are larger in size than PIPE placements and are normally sold by the issuer to a financial intermediary and then resold by that financial intermediary to a group of QIB’s. QIB’s are larger institutions that have over $100M under management. Reg S is a form of private offering involving only non-U.S. investors. Since 1997, Reg S offerings have become less used because of changes to SEC regulations covering such offerings and because of the increase in popularity of PIPEs offerings. What is the difference between a Traditional PIPE and Structured PIPE?To put it simply, Traditional PIPEs are not price protected and Structured PIPEs are price protected. Traditional PIPEs include Common Stock, Common Stock - Shelf Sale, and Convertible - Fixed offerings. These traditional transactions have one fixed price that cannot change or fluctuate regardless of changes in market conditions of the common stock. Structured PIPEs include Common Stock - Reset, Convertible - Variable, Convertible - Reset and Structured Equity Line offerings. These structured transactions have prices that can be adjusted downward if there is a change in market conditions or fundamental conditions of the company. Structured placements have the potential effect of creating excessive dilution in the event the price of the common stock decreases after the closing date of the placement.
Why Would a Public Company Do a PIPE?A PIPE is an alternative way for public companies to raise capital. Issuing a PIPE for cash has certain advantages over a secondary public offering. Among the most important of those advantages is that the time and expense needed to complete a PIPE is much less than that needed to complete a public offering. Often times the public company does not need to perform a road show and expend hours of management time in a PIPE. Especially over the past couple of years, as the markets have remained relatively closed to secondary financing, PIPEs have emerged as a stable and sustained source of equity capital for public companies of all sizes.
How Can the Structure of a PIPE Affect My Company’s Stock Price?PIPE financings can take many forms. The most basic is a Common Stock placement that is sold at some set discount or premium to the market price at closing. This type of structure may also include warrants that let the private placement investor purchase more stock at a set premium price for a period of time. Another basic structure is the Fixed Convertible security (either Preferred Stock or Debt). These securities yield a current return through interest or dividends and can be converted by the investors into shares of the company’s common stock at a set price (usually at some set discount to the market price at closing). Private Placements structured in either of these basic structures are usually considered a good sign for the public company. They convey that the private placement investors believe in the company’s prospects for the long term and are willing to take on market risk with their investment.

The private placement structures that have the potential to cause excessive dilution are Variable Convertibles, Reset Convertibles, and Reset Common Stock placements. All of these structures enable the Investors to convert their securities into common stock at a price (or at a discount to a price) that is based on the market price at the time of the conversion. In their most basic form, the securities allow the investors to convert and make a profit whether the stock price rises or decreases in the future. For example, if the market price at closing is $5.00, but the market price when the Investors choose to convert is $3.00, the investors will be able to convert with a conversion price of $3.00 (or some discount to $3.00). A $3.00 conversion price is of course more dilutive than a $5.00 conversion price. If an Investor is converting $1,000,000 of a total $2,000,000 convertible security, the Purchaser will get 333,333 at $3.00 rather than 200,000 shares at $5.00 for the $1,000,000 security. Any decrease in the company’s stock price can be exacerbated by the potential need by the Investor to sell the shares received in its conversion into the market; instead of selling 200,000 shares, the Investor has to sell 333,333 shares. This may cause the stock to go down further to, say, $2.00. Now the investor has to convert his remaining $1,000,000 at $2.00 and will receive 500,000 shares. The investor may again have to sell these shares in the market, thereby causing the price to go down even more. Such securities have been termed Toxic Convertibles, Death Spiral Convertibles, or Floorless Convertibles.

As concerns relating to these securities have grown, many beneficial features have been added to protect existing shareholders. The most important of these is a Floor provision. This provision restricts the investor from converting below a certain price. This effectively limits the potential dilution of any variable or reset convertible security. Another important provision is a Monthly Conversion Limitation. This limits the investor from converting a certain amount of his holdings below the market price during any given monthly period. This is beneficial to the company and its shareholders because it ensures that the investor will not sell too much stock in a down market. Keep an eye out for these and other protections when analyzing any variable or reset placement.
How Do I Know Whether A PIPE is Good or Bad for the Issuer’s Stock?The key to understanding what effect a PIPE can have on the common stock of a particular Company is to study the terms and investors involved in the transaction. Every PIPE is a good indicator of what large institutions think of a company at the time of the closing.

 
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About DFS Worldwide, LLC.
DFS WORLDWIDE LLC., can arrange money for when your business needs it the most. We Specialize in helping businesses with their cash flow, by providing solutions for the ever present need for money. We do this in several ways including factoring, purchase order funding, equipment leasing, asset based lending and many other funding alternatives. We value professionalism; being fair; recognizing that what's best for the customer is what's best for us; we don't compromise our principles to do a deal. We take pride in our work and our relationships.

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Source:DFS Worldwide, LLC.
Website:http://www.diversifiedfinancialservices.net
Phone:702.425.2303
Zip:89120
City/Town:Las Vegas - Nevada - United States
Industry:Accounting, Finance, Business
Tags:bb, ipo, otc, pink sheet, publically traded companies, reg-s transactions, securities, stock
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