Pipe Transaction: How Public Companies Raise Private Capital

A PIPE transaction relies on the exemption from registration under Section 4(a)(2) or Regulation D. Rule 506(b) permits sales to qualified institutional buyers (QIBs) and up to 35 non-accredited investors. Rule 506(c) allows general solicitation but restricts participation to verified accredited investors only. The private placement exemption must be satisfied on every element or the transaction loses its exempt status.

Digital asset regulation counsel evaluates the applicable exemption for each PIPE transaction structure, advises on accredited investor and QIB verification requirements, and represents issuers and investors in SEC enforcement proceedings arising from alleged violations of the private placement exemption.

A common stock PIPE places newly issued shares at a discount to the market price. SPAC PIPEs fund the acquisition component of a de-SPAC transaction at the SPAC trust value. A convertible note PIPE places debt instruments that convert into equity at a fixed or variable conversion price. A warrant PIPE places warrants giving investors the right to buy additional shares at a set price.

Venture capital and growth equity counsel advises issuers and institutional investors on the securities type selection for each PIPE transaction, evaluates the accounting treatment of convertible instruments and warrants, and advises on the anti-dilution and price reset provisions that govern the conversion mechanics.

The securities purchase agreement sets the purchase price, security type, MFN terms, and representations. MFN clauses require the issuer to offer the same terms as any more favorable deal the issuer completes. PIPE investors typically receive shares at a 5 to 15 percent discount. Anti-dilution provisions protect investors against future equity issuances below the PIPE price.

Capital markets counsel negotiates the securities purchase agreement, advises on the most favored nation and anti-dilution provisions applicable to the PIPE investor's position, and advises on the closing conditions and representations required to protect the issuer against misuse of proceeds.

A registration rights agreement obligates the company to file a resale registration statement within 30 to 45 days. Failure to meet the filing deadline triggers liquidated damages. PIPE investors may use Rule 144 to resell unregistered shares after a one-year holding period. The SEC must declare the registration effective within 90 to 120 days. Missing any of those deadlines puts the company in breach of the registration rights agreement.

Acquisition finance counsel prepares and negotiates the registration rights agreement, manages the resale registration filing process with the SEC, and advises on the Rule 144 resale holding period requirements applicable to PIPE shares before the resale registration becomes effective.

A public company must file a Form 8-K to report a material definitive agreement. A PIPE securities purchase agreement is a material definitive agreement. The Form 8-K must be filed within four business days of signing. PIPE investors agree to keep the transaction confidential until the company files the Form 8-K. Regulation FD obligations apply when PIPE transaction terms are shared with potential investors before the deal is signed.

Banking and finance counsel advises on the Form 8-K disclosure obligations triggered by the PIPE transaction, manages the timing of the public announcement, and advises on the Regulation FD obligations that apply when PIPE transaction terms are shared with potential investors before the deal is signed.

MNPI, or material non-public information, is the central compliance risk in PIPE transactions. PIPE investors receive MNPI before the transaction is publicly announced. Trading in the company's securities while in possession of MNPI is illegal. Most PIPE investors enter into a standard information barrier agreement. They agree not to trade until the information becomes public. When the Form 8-K is filed, the trading restriction lifts. Companies must also evaluate whether PIPE participation by company insiders violates their trading window or Rule 10b5-1 plan.

AML compliance counsel advises PIPE investors and issuers on the MNPI information barrier requirements, evaluates the trading window and Rule 10b5-1 compliance issues that arise when company insiders participate in PIPE transactions, and advises on the insider trading analysis required when company-affiliated investors receive PIPE shares.

Dilution is the primary risk that PIPE transactions create for existing shareholders. Issuing new shares at a discount reduces the value of every existing share. NYSE and Nasdaq rules require shareholder approval for PIPE transactions that dilute existing shareholders by 20 percent or more. Anti-dilution provisions in the securities purchase agreement protect PIPE investors. Price protection provisions govern what happens to conversion prices when the company issues equity below the PIPE price after closing.

Accountant liability counsel evaluates the dilution impact of the proposed PIPE transaction structure, advises on the exchange listing thresholds that require shareholder approval, and advises on the price protection and anti-dilution mechanics applicable to convertible PIPE instruments.

PIPE transactions close quickly. Compliance cannot be an afterthought. The issuer must identify all disclosure obligations before the investor list is assembled. Every PIPE investor must be verified as an accredited investor or QIB before securities are sold. The company's board must evaluate the PIPE transaction's impact on existing shareholders and exchange listing requirements. A legal opinion confirming the private placement exemption is required at closing. PIPE transactions that close without legal opinions on the exemption are not exempt from registration.

Business investment law counsel designs the PIPE transaction compliance framework, verifies accredited investor and QIB status for each participant, advises on the board approval process and exchange listing requirements, and provides the legal opinion confirming the private placement exemption at closing.