What Is a PIPE?

Private Investment in Public Equity, better known as a PIPE, is a financing structure frequently used by small and mid-cap public companies to raise capital quickly and by sophisticated investors to obtain discounted equity with negotiated protections. PIPEs sit at the intersection of federal securities law, state “blue sky” considerations, exchange rules, and practical deal execution. When done correctly, they can be an efficient and powerful tool. When done poorly, they can create significant regulatory, disclosure, and litigation risk.

This article provides an overview of what a PIPE is, how PIPE transactions are structured, and the key legal issues that both issuers and investors should consider.

The Basics: What Is a PIPE?

A PIPE transaction is a private sale of equity or equity-linked securities by a public company to a limited number of accredited or institutional investors, typically conducted pursuant to Section 4(a)(2) of the Securities Act of 1933 or Regulation D. The securities are sold in a private placement and later registered for resale with the SEC through a resale registration statement.

Unlike a traditional public offering, a PIPE does not involve an underwritten sale to the public at large. Instead, the company negotiates directly with one or more investors: often hedge funds, family offices, private equity funds, or sophisticated or strategic investors.

PIPEs are particularly common among:

• Micro-cap and small-cap public companies

• Companies needing fast access to capital

• Issuers that may not be able to complete a traditional follow-on offering on favorable terms

Typical PIPE Structures

PIPEs are highly customizable, but most fall into a few common categories:

1. Common Stock PIPE

Investors purchase newly issued shares of common stock at a fixed price, usually at a discount to the current market price. The issuer agrees to file a resale registration statement covering the shares.

2. Convertible PIPE

Investors purchase convertible notes or convertible preferred stock that convert into common stock, often at a fixed price or subject to price adjustments. These structures require careful attention to dilution, exchange rules, and accounting treatment.

3. Structured PIPE

These transactions may include variable conversion prices, price resets, or other features tied to market performance including the trading price of the issuer’s common stock. While they can be attractive to investors, structured PIPEs raise heightened regulatory, disclosure, and stock exchange concerns and must be handled with care.

Why Public Companies Use PIPEs

For issuers, PIPEs offer several advantages:

• Speed: PIPEs can often be executed in weeks, not months.

• Certainty of Capital: Pricing and investor commitments are negotiated upfront.

• Lower Transaction Costs: Compared to fully marketed public offerings.

• Flexibility: Terms can be tailored to the company’s capital needs.

However, PIPEs are not without drawbacks to the issuer. The discounted pricing and registration rights can result in dilution, downward pressure on stock price, and investor relations challenges if not properly managed.

Why Investors Like PIPEs

From the investor’s perspective, PIPEs provide:

• Discounted Entry: Securities are typically priced below market.

• Liquidity Path: Through a resale registration statement.

• Negotiated Protections: Including registration rights, anti-dilution provisions, information rights, and closing conditions.

• Direct Access: To management and deal terms not available in public markets.

Sophisticated investors often view PIPEs as a way to balance private-market protections with public-market liquidity.

Key Securities Law Considerations

PIPE transactions raise several important legal issues that require experienced counsel.

Federal Securities Law Compliance

Most PIPEs rely on Section 4(a)(2) or Rule 506 of Regulation D, meaning:

• Investors must be accredited (or sophisticated in limited circumstances)

• No general solicitation (unless structured under Rule 506(c))

• Proper disclosure must be provided to avoid antifraud liability

Resale Registration Statements

A core feature of PIPEs is the issuer’s obligation to file and maintain a resale registration statement. Poorly drafted registration rights can expose issuers to penalties, cash damages, or investor claims.

Exchange Rules

NASDAQ and NYSE have shareholder approval rules triggered by:

• Issuances exceeding 20% of outstanding shares

• Sales below minimum price thresholds
  Failure to analyze these rules early can derail a transaction or force renegotiation.

State Securities Laws

Although federal law preempts many state filing requirements for Rule 506 offerings, notice filings and fees may still apply. Proper compliance remains essential.

Disclosure and Insider Trading Risks

Because PIPE investors often receive material nonpublic information, careful attention must be paid to:

• Confidentiality agreements

• Insider trading policies

• Public disclosure timing

• Regulation FD compliance

Missteps in this area can result in SEC enforcement actions or shareholder litigation.

The Importance of Experienced Counsel

PIPE transactions may appear straightforward, but they involve overlapping legal regimes and high scrutiny from regulators, exchanges, and plaintiffs’ attorneys. An experienced securities attorney helps:

• Structure the transaction to minimize dilution and regulatory risk

• Navigate exchange approval requirements

• Draft enforceable and balanced registration rights

• Coordinate SEC filings and ongoing reporting obligations

• Protect both issuers and investors from avoidable liability

Final Thoughts

A PIPE can be a highly effective financing tool for small public companies and an attractive investment opportunity for sophisticated investors. But success depends on thoughtful structuring, precise legal execution, and a clear understanding of the securities law landscape.

If you are a public company considering a PIPE, or an investor evaluating participation in one, engaging experienced securities counsel early in the process can make the difference between a smooth transaction and a costly problem. My firm has significant experience in the area, including one year being one of the 10 most active law firms in the US for representing investors in PIPE transactions.

Disclaimer: This blog post is provided for general informational purposes only and does not constitute legal, tax, or financial advice. Reading this post does not create an attorney-client relationship with me or my law firm. Reach out for a consultation and to obtain advice specific to your individual legal needs.