Option trading pipes
A private investment in public equityoften called a PIPE dealinvolves the selling of publicly traded common shares or some form of preferred stock or convertible security to private investors.
It is an allocation of shares in a public company not through a public offering in a stock exchange. PIPE deals are part of the primary market. The attractiveness of PIPE transactions has waxed and waned since the late s. For private equity investors, PIPEs tend to become increasingly attractive in markets where control investments are harder to execute. Generally, companies are forced to pursue PIPEs when capital markets are unwilling to provide financing and traditional equity market alternatives do not exist for that particular issuer.
In recent years, top Wall Street investment banks have become increasingly involved in the PIPE market as placement agents. Through the acceleration of the credit crisis in SeptemberPIPE transactions provided quick access to capital at a reasonable transaction cost for companies that might otherwise have been unable to access the public equity markets.
Recently, many hedge funds have turned away from investing into restricted illiquid investments. Some investors, including Warren Buffett found PIPEs attractive because they could purchase shares or equity-linked securities at a discount to the public market price and because it had provided an investor the opportunity to acquire a sizable position at a fixed or variable price rather than pushing the price of a stock higher through its own open market purchases.
Existing investors tend to have mixed reactions to PIPE offerings as the PIPE is often highly dilutive and destructive to the existing shareholder base. Depending upon the terms of the transaction, a PIPE may dilute existing shareholders' equity ownership, particularly if the seller has agreed to provide the investors with downside protections against market price declines a death spiralwhich can lead to issuance of more shares to the PIPE investors for no more money.
In these instances, the SEC has shown that the fund knew about the upcoming offering in which it would be involved prior to shorting shares. Many reverse mergers are accompanied by a simultaneous PIPE transaction, which is typically undertaken by smaller public companies. Shares are sold at a slight discount to the public market price, and the company typically agrees to use its best efforts to register the resale of those same securities for the benefit of the purchaser.
The regulatory environment in certain countries, including the United States, Australia, Canada, and the United Kingdom are accommodating for PIPE transactions, however in certain areas there are stated preferences for rights issueswhich allow existing shareholders an opportunity to invest before the company seeks outside capital.
In these jurisdictions, once a company has completed a rights offering, it may pursue a PIPE transaction. While current regulations permit PIPE transactions, it is widely perceived [ citation needed ] that such transactions are an option of last resort for failing firms and a means by which unscrupulous investors may profit at the expense of common stockholders.
From Wikipedia, the free encyclopedia. This article is about private investments in public equity or PIPEs. For investments in private equity through publicly traded vehicles, see publicly traded private equity. Private equity and venture capital. History of private equity and venture capital Early history of private equity Private equity in the s Private equity in the s Private equity in the s.
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