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When did PIPEs Get So Popular?

PIPE financing has been around for a long time. However, it was not until the 1990s that this method of financing started to get popular. Like many things, PIPE financing had a relatively tumultuous beginning. The use of PIPEs exploded with the advent of Regulation S in 1990.This SEC regulation allowed public companies to sell unregistered securities to non-U.S. persons that could be resold into the public markets after a 41-day hold period.Public companies liked Regulation S because they could avoid the time, expense, and disclosure requirements of filing a registration statement.Investors liked Regulation S because they had the freedom to sell the securities (which were usually issued at a discount to market) after only 41 days. Although Reg. S became an effective platform for public companies to raise capital, some public companies and investors began to abuse Regulation S. The most common abuse involved companies that sold too much stock at too much of a discount without disclosing the terms of those sales to their existing shareholders. By 1997, in response to these abuses of the Regulation S registration loophole, the SEC extended the holding period of securities sold in these placements to equal those sold in Regulation D.


By then, however, the use of PIPE financing had become a lifeline for many public companies and the ability to obtain capital relatively quicklyand inexpensively became very appealing for small and mid cap public companies. Over the last few years the use of private placement financing has exploded. Not only have the dollars flowed into private placements at an exponential rate, but the size and sophistication of the private placement transactions have also increased dramatically. Whereas private placements were first closed in small amounts (usually $1M-$5M), they are now routinely over $20M and private placements of $100M+ are becoming more and more prevalent. Likewise the sophistication of the investors involved in private placement transactions has skyrocketed. In the early 1990s most private placements were purchased by individual investors and select offshore institutions. Today, U.S.-based institutional investors (including mutual funds, venture capital firms, private equity firms, hedge funds, and pension funds) dominate the private placement market. The typical institution manages over $500M and devotes a portion of that capital to private placement investing. One of the most significant evolutionary trends in the PIPE market is the decrease in Structured PIPEs and the increase in Traditional PIPEs. Structured PIPEs have historically been the source of the market's negative publicity, but with the increased size of issuers, investors, and agents utilizing the market, the stigma of Structured PIPEs has been replaced with the respectability and relative normalcy of Traditional PIPEs. This change, in turn, has led to an ever-increasing flow of deals, market participants, and available funds for PIPE financing.

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