Private investment in public equity (PIPE) is a financial arrangement where a company issues public securities to an investor at a price below market value to raise additional capital. PIPE deals can involve stocks, bonds, or convertible debt and can be advantageous for smaller companies. However, they have been scrutinized for potential insider trading and dilution of public investors’ securities.
Private investment in public equity, also known as a PIPE deal, is a financial arrangement in which a company privately issues public securities (stocks or other equity) to an investor at a price below market value. This is a technique for the issuing company to raise additional capital. Clearly in their name, private investment in public equity deals is privately arranged between the buying investor and the issuer, although the company’s securities are publicly traded.
While these deals are primarily for preferred or common public stock, private investment in public equity deals may also deal in convertible debt, such as company bonds. Situations in which common or preferred stocks are traded are referred to as traditional private investments in public equity deals, while sales involving bonds or other convertible debt are understood as structured private investments in public equity deals.
A private investment in public capital can also occur when a private company acquires and merges with a public company. This process, called an alternative public offering, combines a reverse merger with a private investment in public capital. In such a case, the shares of the public company are sold to the private company at a discount rate. These offerings can save a private company that wants to go public the time and labor involved in registering for an initial public offering (IPO). By acquiring a company that has already gone through an IPO, a private company can avoid having to register and deal with its own IPO, while still receiving all the capital benefits of issuing shares publicly.
Private investment in public equity deals can also be advantageous for companies that are having difficulty finding new financing. These investment deals can work faster and just as efficiently to raise additional capital than secondary offerings. Secondary offerings occur when a public company issues new shares after an IPO. Private investments in public equity deals are generally more attractive to smaller companies that have a harder time finding new capital than larger, more established companies.
Though rife with potential gains, private investments in public equity have been a source of scrutiny in some markets. Some scrutiny has resulted from the possibility of private dealings being made using illegal insider information. There is also a risk that by selling securities at a discount to a private investor, the value of a company’s securities held by public investors could be diluted, unfairly increasing the investment risk of public shareholders who invested at a value more expensive market. These deals also carry their risk: struggling businesses may fail even after raising additional capital. In such situations, the private investor, the company and the public shareholders suffer.
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