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Carla Dupuis
Fairchild Semiconductors (NYSE: FCS)

PIPEs and Restricted Securities

PIPEs are private placements of equity or equity-linked securities made by public companies, spanning from blue chip to micro-cap.  Since these private deals are made without prior registration of the securities sold, the securities issued are quite illiquid. 

Because of the increasing cost of selling stock to the public, PIPE transactions account for a greater share of new stock issuances for micro-cap companies than they did in the past.  PIPEs also offer:

  • Greater flexibility, especially in deal sizes
  • Faster executions
  • Minimal preparation needed before the placement
  • Less management time spent in preparation
  • Greater confidentiality
  • Minimizes or eliminates the typical “announcement effect” price declines that often take place when filing a traditional public offering

According to PrivateRaise, PIPEs have enjoyed record growth in recent years, with $28.14 billion raised in 1,326 deals in 2006, $38.8 billion raised in 1,437 deals in 2007 and $89.5 billion raised in 1,110 deals through the first three quarters of 2008.

Registration                                                                  

Today, standard PIPE transactions take place with the expectation that the issuer will file a registration statement for the deal within approximately 30 days.  This implies that the restricted common stock issued may become registered within 120 days or more after the PIPE.  However, some deals are never registered.  And unregistered stock is restricted, leaving investors reliant on Rule 144 to sell their securities.  Further, warrants and convertibles are non-tradable, restricted securities, regardless of whether the “underlying” common has been registered.

Restricted Securities

When investors who hold restricted securities cannot take advantage of a registration statement or Rule 144, they can sell them in private transactions in the secondary market.  When sold privately, restricted securities sell at a discount, because they are illiquid.

The proprietary LiquiStat™ database provides Pluris with a record of illiquidity discounts taken in private sales that create empirical support for our valuations.

For more information on our PIPE security valuations, contact Pluris today.

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