To assist interested parties in navigating a private investment in public equity (PIPE) transaction in Canada, we have prepared the following summary of key considerations.
What is a PIPE Transaction?
- PIPE transactions are private placements of securities issued by public companies that are usually significant, but still minority, investments. In most cases, PIPEs are offered only to certain accredited investors, including institutional investors, private equity investors, and strategic investors (such as sovereign wealth funds).
- The issuance of securities in a PIPE transaction is made under one of the exemptions from the prospectus requirements of Canadian securities laws. Accordingly, there is minimal involvement of any securities commission. However, stock exchanges have established regulations relating to pricing and shareholder approval requirements.
Who is a Typical PIPE Issuer?
An issuer that needs to raise money in circumstances where it may not be able to do so by way of a public offering, including (i) issuers in financial distress (or otherwise seeking to improve their balance sheet), and (ii) issuers who may not have access to institutional investors because of low market capitalization and a small trading float
Who is a Typical PIPE Investor?
- Traditionally, PIPE investors have tended to be public market investors that focus on short-term investments. Investors with a longer-term strategy, such as private equity investors, have historically avoided PIPEs because of the inability to obtain control over the issuer.
- More recently however, private equity investors have shown an interest in acquiring substantial minority positions if the issuer is a strong company, established in one of the industries that the investor has experience in, and is one where the investor may be able to negotiate some control rights.
Advantages of a PIPE Transaction
- A PIPE transaction offers several advantages for an issuer, including
- can be completed relatively quickly;
- transaction expenses lower than the expenses an issuer would incur in connection with a public offering;
- minimal involvement of any Canadian securities commission;
- marketed and completed on a confidential basis. (The transaction will be disclosed to the public only after definitive purchase commitments are received from the PIPE investor.);
- the issuer may be able to expand its base of accredited and institutional investors and may develop a strategic relationship with a large shareholder; and
- the issuer may be able to negotiate certain protections, such as hold periods and/or standstills.
- For an investor, advantages of a PIPE transaction include:
- the ability to receive a discount to the current market price in order to compensate for the initial four-month statutory hold period;
- the ability of the investor to negotiate additional governance rights and protections, such as board seats, anti-dilution protection, pre-emptive rights, registration rights, or veto rights; and
- high upside if equity bought at a discount based on broad market factors (e.g. a well run company with a depressed price due to poor general market conditions).
Disadvantages of a PIPE Transactions
- PIPE transactions have a few disadvantages for an issuer, including:
- the offering would be restricted to those purchasers who meet prospectus exemption requirements, principally accredited investors;
- in order to compensate for the initial four-month statutory hold period, PIPE investors will require a discount to market on the purchase price; and
- in general, a reporting issuer cannot sell more than 20% of its outstanding stock at a discount without receiving prior shareholder approval.
- For an investor, disadvantages of a PIPE transaction include:
- equity capital at higher risk than debt (as a result, more exposure to issuer’s downside risk); and
- reduced liquidity due to a limited ability under securities laws to exit a substantial/control position.