This article is written by Ridhima Singh ,LL.B. HON’S (1st YEAR) ,ALLAHABAD UINVERSITY during her internship at LeDroit India.
Keywords: Accredited Investors, Investment, Equity, Transactional Cost, Diluted Shares.
Abstract: Currently in today’s scenario many companies have been suffering to get stability in economic environment as they might not have accurate amount of funds one of the reasons for such instability was global lockdown. Business enterprises especially small one’s who want to restart need a lot of capital and funds that why they are either going for M&A Deals or PIPE transactions. PIPE is nowadays faster and suitable source of financing.
What Is A PIPE Deal?
Private Investment in Public Equity deal refers to the private investors buying a publicly-traded stock at the price which is less than what is being offered to public. This method for raising finances is highly practiced by investment firms, accredited investors, other large firms as well.
The Mergers and Acquisitions are also switching for these PIPE transactions as it is more efficient financing technique. During M&A deal the organisation requires lot of capital to carry out the operations of both the merging companies/organization. PIPE transactions save time and money and raise capital for the organisation more quickly.
PIPE transactions help acquirer to raise capital through stocks. It is preferred more now days because PIPE have very lesser regulatory requirements do deal with which saves time. Through this issuing organisation obtains its funding i.e., investor money just within three to four weeks rather than waiting for months.
Advantages and Disadvantages of using PIPE Transactions:
| Advantages Of PIPE | Disadvantage Of PIPE |
| Quicker source of Financing. Reduced Paperwork Lower Transactional cost Lesser Regulatory Issues Discounted Share Prices. | Share Value Diluted Lesser Capital due to discounted share price Always waiting for the shareholder approval Buyers limited to Accredited Investors |
TYPES OF PIPE TRANSACTIONS
PIPE transactions can be broadly classified into three major categories:
- Standard PIPE Transactions.
- Traditional PIPE Transactions.
- Structured PIPE Transactions.
- Standard PIPE Transactions- Under this transactions the investor or acquirer buys stock of the issuing company through private placement, where the price of stock newly issued is lesser than the current market price.
- Traditional PIPE Transactions- In Traditional Transactions, the price of stock which investor tends to buy is already predetermined and the investor buys the form of preferred stocks that are easily convertible to shares. This is basically done with the future view point that if company gets merged or acquired the investors have option to receive dividends.
- Structured PIPE Transactions-In this form of transactions, the securities which are sold to the investor are in the form of convertible to common stock. The agreements related to these transactions have reset clauses to protect investor from downside risks. These transactions are more time consuming then two mentioned above as it requires a lot of shareholder’s approval.
CONCLUSION
From above we can say most of the small and medium sized organizations opt for PIPE Transactions. M&A are also shifting to PIPE transactions to use it as a source of financing because it’s a quicker and cheaper source. The finances raised through these transactions are more liquid and easily convertible into common stocks or common shares. However, the investors should keep in mind PIPE’s do have risk and can be exploited at issuing company peril if not done in right manner.
