Private investment in public equity

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A private investment in public equity, often called a PIPE deal, involves the selling of publicly traded shares to private investors, rather than to the public through an offering registered with the Securities and Exchange Commission. PIPE transactions are typically undertaken by smaller public companies. Shares are sold at a slight discount to the public market price, and the Company typically agrees to use its best efforts to register the resale of those same securities for the benefit of the purchaser. The benefit to these transactions for smaller issuers is that they provide quick access to capital at a reasonable transaction cost. Some investors find these attractive because they get shares at a discount to the public market price, and because it provides an opportunity to acquire a sizeable position without having to chase a rising stock price caused by their own purchases.

The use of PIPE deals in the U.S. peaked in 2000, with 1,106 such deals raising $24.3 billion, according to PlacementTracker. Their use has been rising again: in 2005, there were 1,301 PIPE deals in the U.S. raising a total of $20 billion. In recent years, top Wall Street firms such as Lehman Brothers and Citigroup have gotten involved in the PIPE market as bankers/placement agents.

A PIPE can be done in some countries, such as the US, but is illegal in other countries where it must be preceded by a rights issue.

Depending upon the terms of the transaction, a PIPE may dilute existing shareholders' equity, particularly if the seller has agreed to provide the investors with protection against market price declines, which can lead to issuance of considerably more shares to the investors for no more money.

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