Private investment in public equity carries several advantages...

Private 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.