how a private investment in public equity works
a publicly traded company may utilize a pipe when securing funds for working capital to fund day to day operations expansion or acquisitions the company may create new stock shares or use some from its supply but the equities never go on sale on a stock exchange 1instead these large investors purchase the company s stock in a private placement and the issuer files a resale registration statement with the sec the issuing business typically obtains its funding that is the investors money for the shares within two to three weeks rather than waiting several months or longer as it would with a secondary stock offering registration of the new shares with the sec typically becomes effective within a month of filing special considerations for pipe buyerspipe investors may purchase stock below the market price as a hedge of protection against the share price going down after news of the pipe gets out the discount also acts as compensation for a certain lack of liquidity in the shares meaning there can be delays in selling or converting the shares to cash since this offering was a pipe the buyers cannot sell their shares until the company files its resale registration statement with the sec 2 however an issuer generally cannot sell more than 20 of its outstanding stock at a discount without receiving prior approval from current shareholders a traditional pipe agreement lets investors purchase common stock or preferred stock that is convertible to common shares at a predetermined price or exchange rate if the business is merged with another or sold soon investors may be able to receive dividends or other payoffs dividends are cash or stock payments from companies to their shareholders or investors because of these benefits traditional pipes are typically priced at or near the stock s market value with a structured pipe preferred stock or debt securities convertible to common stock are sold if the securities contain a reset clause new investors are shielded from downside risks but existing stockholders are exposed to the greater risk of dilution in share values for this reason a structured pipe transaction may need prior stockholder approval companies must sell their shares at a discount meaning that they sell their shares for less than market price in 2023 the average discount on pipe offerings was about 5 3advantages and disadvantages of pipesprivate investment in public equity carries several advantages for issuers large amounts of shares are typically sold to knowledgeable investors over the long term ensuring the company secures the funding it needs pipes can be particularly advantageous for small to medium sized public companies that may have a hard time accessing more traditional forms of equity financing because pipe shares do not need to be registered in advance with the sec or meet all the usual federal registration requirements for public stock offerings transactions proceed more efficiently with fewer administrative requirements however on the downside investors may sell their stock in a short amount of time driving down the market price if the market price drops below a set threshold the company may have to issue additional stock at a significantly reduced price this new share issue dilutes the value of shareholders investments which can lead to a lower stock price short sellers may take advantage of the situation by repeatedly selling their shares and lowering the share price potentially resulting in pipe investors having majority ownership of the company setting a minimum share price below which no compensatory stock is issued can avoid this problem fast source of capital fundsless paperwork and filing requirementslower transactional costsdiscounted share prices for investors diluted share value for current stockholders buyers limited to accredited investorsdiscounted share price less capital for company potential need for shareholder approvalexample of a pipein aug 2023 the aircraft manufacturer archer aviation closed a 215 million investment round that included a pipe financing agreement investors included united airlines ark invest the auto manufacturer stellantis and boeing 4the oversubscribed offering allowed archer to raise an additional 215 million in capital in exchange for equity sales to the investors the raised money will be used as working capital and for general corporate expenses in the company s goal of testing and building new passenger aircraft for the investing companies the deal allowed them to increase their stakes in the company and develop closer cooperation with a potential supplier 