• the sale of convertible preferred stock or convert- General Questions about PIPEs ible debt; and What are PIPEs? • a venture-style private placement for an already- A (Private Investment in Public Equity) refers to public company. any private placement of securities of an already-pub- lic company that is made to selected accredited What are some of the advantage of a PIPE transaction? investors (usually to selected institutional accredited A transaction offers several significant advantages investors) wherein investors enter into a purchase for an issuer, including: agreement committing them to purchase securities • lowering transaction expenses; and, usually,requiring the issuer to file a resale registra- • expanding institutional and accredited investor tion statement covering the resale from time to time of holdings; the securities the investors purchased in the private placement. Equity lines of credit, as described below, • for fixed price transactions, reducing the incentive are not transactions. for investors to hedge their commitment by short- ing the issuer’s stock; What kinds of securities are sold in PIPE transactions? • requiring disclosure of the transaction to the pub- transactions may involve the sale of common lic only after definitive purchase commitments are stock, convertible preferred stock, convertible deben- received from investors; tures, warrants, or other equity or equity-like securities • requiring preparation by the investor only of very of an already-public company. streamlined information, including publicly filed Exchange Act reports; and What are some of the common varieties of PIPE transactions? • enabling a transaction to close and fund within There are a number of common transactions, seven to ten days of receiving definitive purchase including: commitments. • the sale of common stock at a fixed price; • the sale of common stock at a fixed price, togeth- Traditional PIPE Transactions er with fixed price warrants; • the sale of common stock at a fixed price, togeth- What is a traditional PIPE transaction? er with resettable or variable priced warrants; A traditional transaction is a private placement • the sale of common stock at a variable price; of either newly issued shares of common stock or shares of common stock held by selling stockholders Non-traditional transactions generally are (or a combination of primary and secondary shares) of structured as private placements with follow-on (or an already-public company that is made through a trailing) registration rights. This means that once placement agent to accredited investors. investors enter into a definitive purchase agreement, a Investors in a traditional transaction commit to closing is scheduled. Investors fund and the transaction purchase a specified number of shares at a fixed price, closes. Post-closing, the company has an obligation to with the closing conditioned upon, among other things, file a resale registration statement and use its best efforts the ’s preparedness to declare effective a resale reg- to have it declared effective. Typically, the purchase istration statement covering the resale from time to time agreement or a separate registration rights agreement of the shares sold in the private placement. outlines specific deadlines for the company to file, and then to seek effectiveness of, the resale registration What is a “black-out” period? statement. Some transactions provide for the In connection with a transaction, an issuer typ- company to make penalty payments if the company ically must keep effective a resale registration state- fails to meet the deadlines set for filing or effectiveness ment for two years. During this two-year period, the of the resale registration statement. In the case of a issuer may suspend the use of a registration statement PIPE structured as a private placement with follow-on because the registration statement must be amended registration rights, the investor will not have the bene- or corrected to remedy a material misstatement or fit of a registration statement for some time, usually 60 omission. This suspension period often is referred to to 90 days following the closing. As a result, investors as a black-out period. During the black-out period, will hold restricted securities for some period of time. the purchasers will have limited liquidity,as they will not be able to avail themselves of the resale regis- What are the standard terms of a traditional PIPE? tration statement to resell the securities purchased in • private placement to selected accredited investors; the transaction. • investors irrevocably commit to purchase a fixed How do traditional PIPE transactions differ from non-tradi- number of securities at a fixed price, not subject to tional PIPE transactions? market price adjustments or to fluctuating ratios; In a traditional transaction, the investor bears the • purchase agreements generally contain a limitation price risk from the time of pricing until the time of on black-out periods; closing. The issuer is not obligated to deliver addition- • immediately following execution of purchase al securities to the investors in the event of fluc- agreements with investors, the issuer files a resale tuations in stock price or otherwise. Investors enter registration statement covering resales from time into a definitive purchase agreement with the compa- to time of the restricted securities sold in the ny in which they commit to purchase securities at a transaction; fixed purchase price. Investors do not fund at the time • closing of the transaction occurs promptly of entering into the purchase agreement. Instead, the upon notice of ’s willingness to declare effec- company then files a resale registration statement cov- tive the resale registration statement; ering the resale from time to time of those securities by the investors. The transaction closes once the • purchasers are named as “Selling Stockholders” in has indicated its preparedness to declare effective the resale registration statement; and the resale registration statement. Consequently,the tra- • resale registration statement kept effective until ditional investors have available a resale registra- shares may be sold under Rule (k). tion statement at the time of closing. Does the placement agent or a lead investor control the process registration statement is declared effective on the day of in a traditional PIPE transaction? closing (but subsequent to the closing) or on the fol- In a traditional transaction, the process is con- lowing business day. trolled by the placement agent, rather than by a lead Once the resale registration statement is declared investor. The placement agent conducts its own busi- effective, purchasers may deliver to the issuer’s transfer ness and financial due diligence. Investors generally agent a certificate (in contemplation of transferring or limit their diligence investigation to discussions with otherwise disposing of the shares) acknowledging that management and the company’s independent auditors. the purchasers recognize their prospectus delivery Traditional purchasers generally do not negotiate requirement in connection with the shares and mak- for themselves ongoing negative covenants or covenants ing certain representations concerning future sales of relating to information rights or corporate governance. the shares. The issuer’s transfer agent then will provide the pur- When does the PIPE purchaser in a traditional PIPE pay chasers with clean (unlegended) securities. This can for the securities? happen at the closing if investors deliver their certifi- No money is exchanged when the purchase agreement cates to the transfer agent. is executed. Purchasers pay the purchase price only when the purchasers are informed that the resale regis- What are the benefits of traditional PIPE transactions com- tration statement is ready to be declared effective. pared to non-traditional PIPE transactions? By comparison to a structured as a private What are the other closing conditions for a traditional PIPE placement with follow-on registration rights, a tradi- transaction? tional reduces uncertainty, market risk, and illiquidity. Purchasers in a traditional are not • purchase agreement contains standard representa- tions and warranties (similar to those contained in required to close until a resale registration statement is available for subsequent sales of the shares pur- an underwriting agreement) that must be brought down at closing; chased in the transaction. Traditional purchasers are able to obtain unlegended shares short- • delivery of a comfort letter and legal opinions ly after, or at, closing, allowing purchasers flexibility in (including a b- negative assurance relating to disposing of the shares. the Private Placement Memorandum and to the For most registered investment funds, securities pur- resale registration statement) to placement agent; chased in a traditional are counted in the funds’ • before an investor obtains unlegended stock certifi- public basket. This broadens the scope of potential cates, delivery by the investor to the issuer and the investors for traditional s and also generally justi- issuer’s transfer agent of a certificate as to the fies better pricing. investor’s compliance with the prospectus delivery requirement; and Non-traditional PIPE Transactions • closing conditions limited to (1) no occurrence of any material adverse change between execution What are the standard terms of non-traditional (or structured) and closing,