A PIPE (Private Investment in Public Equity) transaction is typically a private placement of equity or equity-linked securities by a public company to accredited investors that is followed by the registration of the resale of those securities with the SEC. Generally the securities are sold at a discount to market price. A traditional PIPE generally involves a fixed number of securities at a fixed price, with the closing conditioned only on the effectiveness of a resale registration statement. Any transaction that does not fall within this parameter is considered non-traditional and the structure can vary widely, including for example price variables (such as a death spiral), warrants and options, convertible securities and equity line transactions.

Traditional PIPE Transactions

In particular, a traditional PIPE is generally a set number of securities at a set price (which may be a discount to market at the time of close) and is conditioned only upon the effectiveness of a re-sale registration statement. A traditional PIPE where the price is a discount to market would differentiate from a non-traditional death spiral in that there would only be one closing in the traditional PIPE and there would be multiple closings with continued downward pressure on the stock price and a continued dilutive effect with a non-traditional death spiral. The transaction documents associated with a traditional PIPE are generally very straight forward and do not contain ongoing negative covenants relating to information rights, future financing or corporate governance.

The terms of a non-traditional PIPE can vary widely but the basic requirements that the investment decision be completed in a private transaction prior to the filing of a registration statement and that the investor bear the risk of an investment are consistent.

Re-Sale Registration Statements

The SEC allows the filing of a re-sale registration statement for a PIPE if 1) the initial sale or placement of securities is conducted in a manner consistent with a private placement (no general solicitation or advertising and offerings made to accredited investors) and 2) the investors enter into definitive commitments which are only subject to the satisfaction of closing conditions outside the control of the investor, such as the effectiveness of a re-sale registration statement (that is, investor has made the investment decision and assumed the risk prior to the filing of the registration statement).

Section 9 of the Securities and Exchange Act of 1934, as amended, prevent the Investor from entering into hedging transactions (short sales and the like) from the time of entering into the PIPE transaction agreement through the effectiveness of the registration statement. In addition, Investors must be aware of insider trading rules (Section 10 of the Exchange Act and rules promulgated thereunder), throughout the period of the PIPE transaction. Moreover, the SEC has taken the position that an Investor that engages in short-selling prior to the final closing of PIPE and effectiveness of a registration statement, is engaging the unregistered sale of securities in violation of Section 5 of the Securities Act of 1933, as amended.

Securities attorney Laura Anthony provides expert legal advice and ongoing corporate counsel to small public Companies as well as private Companies seeking to go public on the Over the Counter Bulletin Board Exchange (OTCBB). Ms. Anthony counsels private and small public Companies nationwide regarding reverse mergers, due diligence on public shells, corporate transactions and all aspects of securities law.

Ms. Anthony is the Founding Partner of Legal & Compliance, LLC, a national corporate, securities and civil litigation law firm based in West Palm Beach, Florida. The firm’s corporate and securities attorneys provide technical legal services to small and mid-size private and public (OTCBB) Companies, entrepreneurs, and business professionals nationwide. Contact us today for a FREE consultation!

In today’s financial environment, many Issuers are choosing to self underwrite their public offerings, commonly referred to as a Direct Public Offering (DPO). Moreover, as almost all potential investors have computers, many Issuers are choosing to utilize the Internet for such DPO’s. The Securities and Exchange Commission (SEC) has published rules for utilizing the Internet for an offering.

To comply with the SEC rules for electronic use, an Issuer must comply with the following minimum rules, among others:

• An electronic prospectus must provide the same information as a paper written prospectus;
• The Investor must elect to receive electronic delivery of the prospectus and must be provided with personal access codes to access electronic materials over the Internet;
• The Investor must pre-qualify to receive the offering materials (such as being in a particular state, being accredited, etc.) prior to receiving access codes;
• The Investor must be immediately notified of any amendments or changes in the offering documents; and
• The Issuer must have a system for evidencing delivery of materials and maintaining copies of any correspondence and communications by and between the Issuer and Investor through electronic means;

State and Federal Securities Laws

The National Securities Markets Improvement Act of 1996 preempts state registration requirements of certain federally covered securities including most registered offerings and offerings exempt under Rule 506 of Regulation D of the Securities Act of 1933. However, for offerings that are not preempted by the 1996 Act, state securities laws must be reviewed and abided by.

Practically all states have adopted statutes, rules, orders or policies exempting Internet offerings and governing their mechanics. Compliance with the various state securities law requirements may be daunting, however, an Issuer can utilize disclaimers to mitigate the risks of violations. The disclaimers can be general, focusing on the state(s) where the securities are being offered and indicating that the offering is not made to persons elsewhere, or more specific disclaiming an offering in a particular state. Again, an Issuer must maintain control over the potential investors that review its offering documents through access procedures and other internal controls.

Silence is Golden

As with all offerings, Issuers should be careful not to condition the market or discuss the offering on their website with access to offering information being given only to prequalified potential investors.

Securities attorney Laura Anthony provides expert legal advice and ongoing corporate counsel to small public Companies as well as private Companies seeking to go public on the Over the Counter Bulletin Board Exchange (OTCBB). Ms. Anthony counsels private and small public Companies nationwide regarding reverse mergers, due diligence on public shells, corporate transactions and all aspects of securities law.

Ms. Anthony is the Founding Partner of Legal & Compliance, LLC, a national corporate, securities and civil litigation law firm based in West Palm Beach, Florida. The firm’s corporate and securities attorneys provide technical legal services to small and mid-size private and public (OTCBB) Companies, entrepreneurs, and business professionals nationwide. Contact us today for a FREE consultation!