Custom Search

Why Do I Sometimes Hear Negative Things About PIPEs?

Certain PIPEs have historically received a lot of criticism from the press.Typically, PIPEs are seen as extremely positive, because an infusion of capitalis absolutely necessary for the future prosperity of many small and midsize companies that are burning capital to fuel their growth.However, PIPEs are sometimes seen as negative because of the price that the company pays to obtain the capital.The biggest concern with a PIPE is dilution.This concern is basically that the financing will cause too many shares of the company to be sold into the market relative to the current number of issued and outstanding shares.Some transactions, called Structured PIPEs, are structured so that the investor may convert and sell his shares at a discount to the future market price of the common stock.With these transactions, the theoretical dilution is enormous because the investor can convert no matter how much the stock price decreases in the future.All of the negative press about PIPEs in the past has surrounded Structured PIPE offerings.

However, as the overall market has continued to increase in scope and size and as issuers have become more educated about the risks of Structured PIPEs,the use of these potentially dangerous financing vehicles has essentially stopped.While in 1995, approximately 25% of the financing in the PIPE market was raised through a Structured PIPE format, today that usage is less than 2%.The discontinuation of the Structured PIPE format over the past few years has led to a widespread adoption of PIPEsas a useful, valuable, and often used financing vehicle by public companies of all sizes and has opened the market's doors to larger investment banks and institutional investors.

Back to Private Placement Basics