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As an investor in the PIPE marketplace, my first comment would be that a
Company needs to weigh all their alternatives prior to choosing a structure and
investor and be very careful in the due diligence process. The PIPE environment changes rapidly
and there are many different types of Investors and
structures in the marketplace. When reading about PIPEs you
will see many references to market based pricing metrics -
What I would say is do your homework and make sure that each
particular structure presented to your company is clear
as to what that particular investor is offering and that
they are someone that you feel comfortable with choosing
as your long-term financing partner.
Choosing the correct investor should not always be based on
price. Below is a list of questions which are very important
during the investment process and each particular question /
answer should be fully understood prior to
choosing your financing partner for future growth.
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Investor Screening
Questions |
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What are there
intentions?
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How have they behaved
in the past?
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Can you call their
references?
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Past successes / failures? Historical returns?
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What return are they targeting?
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Fixed price securities?
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What is their reputation in the marketplace?
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What is their value-added offering?
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Is this someone you would want to interact with?
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Are they a control or passive investor?
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PIPE transactions are privately issued equity or equity-linked securities that are sold to accredited
investors under Regulation D by public companies. PIPE issuers range in size from small OTC Bulletin Board
companies to large-cap NYSE-traded companies. Transaction sizes have ranged from under $0.5 million to
over $200 million.
INDUSTRY
PIPE investors are often industry agnostic, that being
said due to the capital intensive nature of the
businesses, technology and healthcare companies have
historically dominated the marketplace in sheer dollars
raised.
While a PIPE transaction is marketed to a
limited number of investors over a short period of time, a
traditional public transaction may require a broader
marketing process and, in the case of an add-on offering,
the filing of a registration statement with the SEC prior
to pricing. This filing process tends to create an
overhang in the market, resulting in an “announcement
effect” on the issuer’s stock. This announcement effect has
been studied, and most practitioners use a proxy of a
15% decline in the stock price prior to pricing.
ISSUER CONSIDERATIONS
Following are the benefits a potential issuer may consider
when evaluating a PIPE transaction:
- Does not require an SEC registration prior to offering
- Ability to do smaller raises vs. traditional public alternatives
- Greater confidentiality during capital raising process
- Eliminates typical price declines on filing of traditional public offering
- Requires minimal preparation before launch
- Increases issuer’s trading liquidity levels and diversifies shareholder base
- Allows for a targeted marketing process
- Less time intensive for management vs. traditional public alternatives
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Definition of a PIPE
A transaction in which accredited investors are allowed to purchase stock
in a public company, usually below the market price. The stock is registered with the SEC so that it may later be
resold to the public.
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