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 a typical “equity line” financing arrangement, an investor and an Issuer enter into a written agreement whereby the Issuer has the right to “put” its securities to the investor. That is, the Issuer has the right to tell the investor when to buy securities from the Issuer over a set period of time and the investor has no right to decline to purchase the securities (or a limited right to decline). Generally the dollar value of the equity line is set in the written agreement, but the number of securities varies based on a formula tied to the market price of the securities at the time of each “put”.

Similar to PIPE Transactions

Most equity line financing arrangements are similar to a PIPE (private investment into public entity) transaction such that the Issuer relies on the private placement exemption from registration to sell the securities under the equity line and then files a registration statement for the re-sale of such securities by the investor. However, where in a PIPE transaction the investor bears the risk, in an equity line transaction, the investor often bears little risk due to the delayed nature of the puts coupled with the price of the securities being a formula tied to market price. Accordingly, the SEC views equity line financing registrations as indirect primary offerings.

Although the SEC views the equity line as an indirect primary offering, it allows the filing of re-sale type registrations if the following conditions are met:

• The Issuer must have completed the private transaction prior to filing the registration statement (i.e. both parties must be fully contractually bound with all material points agreed upon)
• The “resale” registration statement must be on the form that the Issuer is eligible to use for a primary offering; and
• In the prospectus the investors must be identified as both underwriter(s) and selling shareholder(s).

Investors Must Be Bound to Purchase All Securities

In order for the first condition to be met, the Investor must be irrevocably bound to purchase all the securities. That is, only the Issuer can have the right to exercise the put and, except for conditions outside the investor’s control, the investor must be irrevocably bound to purchase the securities once the Issuer exercises the put. In addition, the obligations of the Investor must be non-assignable to meet the “irrevocably bound” condition.

Investors May Not Possess Ability to Make Investment Related Decisions

Moreover, if the Investor has the ability to make investment related decisions under the terms of the contract, they will not be deemed to be irrevocably bound allowing for the filing of a re-sale registration statement. Examples of investment decisions that would viewed by the SEC as creating a continuing transaction (and not a completed transaction allowing for the filing of a registration statement), include:

• Agreements that give the Investor the right to acquire additional securities (including through warrants) at the same time or after the Issuer exercises a put;
• Agreement that permit the Investor to decide when or at what price to purchase the securities underlying the put;
• Agreements with termination provisions that have the effect of causing the Investor to no longer be irrevocably bound to purchase the securities; and
• Agreements that allow the Investor to exercise a “due diligence out”.

However, the Agreements may allow for customary “bring downs” as conditions to closing such as customary representations and warranties and customary clauses regarding no material adverse changes affecting the Issuer that would be within the Investors control.

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!