# Understanding Private Investment in Public Equity (PIPE): Key Insights

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*— Investopedia / Laura Porter*

## What Is a Private Investment in Public Equity (PIPE)?

Private Investment in Public Equity (PIPE) sees institutional or accredited investors purchasing shares directly from public companies, offering a faster capital-raising alternative to secondary offerings. While companies benefit from reduced regulatory hurdles, selling shares at a discount impacts share valuation and can dilute existing equity.  

### Key Takeaways

*   A private investment in public equity (PIPE) involves accredited investors buying stock directly from a public company at a price below the current market value.  
    
*   PIPE agreements are favored for their efficiency in raising capital quickly, bypassing many regulatory hurdles common with public offerings.  
    
*   While PIPEs offer discounted stock prices, they can dilute existing shareholders' stakes and potentially require prior shareholder approval.  
    
*   Traditional PIPEs involve the purchase of common or preferred stock, while structured PIPEs may include convertible debt securities.  
    
*   Investors benefit from discounted share prices, but must contend with potential delays in converting shares to cash and restrictions on immediate resale.

## How PIPE Transactions are Executed

A publicly-traded company may utilize a PIPE when securing funds for [working capital](https://www.investopedia.com/terms/w/workingcapital.asp) to fund day-to-day operations, expansion, or [acquisitions](https://www.investopedia.com/terms/a/acquisition.asp). The company may create new stock shares or use some from its supply, but the equities never go on sale on a stock exchange.

Instead, these large investors purchase the company's stock in a [private placement](https://www.investopedia.com/terms/p/privateplacement.asp), and the issuer files a resale registration statement with the SEC.

The issuing business typically obtains its funding—that is, the investors' money for the shares—within two to three weeks, rather than waiting several months or longer, as it would with a secondary stock offering. Registration of the new shares with the SEC typically becomes effective within a month of filing.

##  Key Considerations for Investors in PIPE Deals

PIPE investors may purchase stock below the market price as a hedge of protection against the share price going down after news of the PIPE gets out. The discount also acts as compensation for a certain lack of [liquidity](https://www.investopedia.com/terms/l/liquidity.asp) in the shares, meaning there can be delays in selling or converting the shares to cash.

Since this offering was a PIPE, the buyers cannot sell their shares until the company files its resale registration statement with the SEC. However, an issuer generally cannot sell more than 20% of its outstanding stock at a discount without receiving prior approval from current shareholders.

A traditional PIPE agreement lets investors purchase [common stock](https://www.investopedia.com/terms/c/commonstock.asp) or [preferred stock](https://www.investopedia.com/terms/p/preferredstock.asp) that is convertible to common shares at a predetermined price or exchange rate. If the business is merged with another or sold soon, investors may be able to receive dividends or other payoffs. Dividends are cash or stock payments from companies to their shareholders or investors. Because of these benefits, traditional PIPEs are typically priced at or near the stock’s market value.

With a structured PIPE, preferred stock or debt securities convertible to common stock are sold. If the securities contain a reset clause, new investors are shielded from downside risks, but existing stockholders are exposed to the greater risk of [dilution](https://www.investopedia.com/terms/d/dilution.asp) in share values. For this reason, a structured PIPE transaction may need prior stockholder approval.

> **Important**
>
> Companies must sell their shares at a discount, meaning that they sell their shares for less than market price. In 2023, the average discount on PIPE offerings was about 5%.

## Assessing the Pros and Cons of PIPE Investments

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](https://www.investopedia.com/terms/p/publiccompany.asp) that may have a hard time accessing [more traditional forms of equity financing](https://www.investopedia.com/articles/investing/030415/difference-between-private-and-public-equity.asp).

PIPE shares don't need advance SEC registration or the usual federal requirements, making transactions quicker and less burdensome.

However, investors might sell their stock quickly, which can lower the market price. If the market price falls below a certain level, the company might need to release more stock at a lower price. Issuing new shares dilutes shareholder value and may decrease the stock price.

Short sellers may exploit this by selling shares frequently, possibly lowering the price and giving PIPE investors majority ownership. Setting a minimum share price below which no compensatory stock is issued can avoid this problem.

Pros

*   Fast source of capital funds
    
*   Less paperwork and filing requirements
    
*   Lower transactional costs
    
*   Discounted share prices (for investors)
    

Cons

*   Diluted share value (for current stockholders)
    
*   Buyers limited to accredited investors
    
*   Discounted share price (less capital for company)
    
*   Potential need for shareholder approval
    

## Real-World Example of PIPE in Action

In Aug. 2023, the aircraft manufacturer Archer Aviation closed a $215 million investment round that included a PIPE financing agreement. Investors included United Airlines, ARK Invest, the auto manufacturer Stellantis, and Boeing.

The oversubscribed offering allowed Archer to raise an additional $215 million in capital, in exchange for equity sales to the investors. The raised money will be used as working capital and for general corporate expenses in the company's goal of testing and building new passenger aircraft. For the investing companies, the deal allowed them to increase their stakes in the company and develop closer cooperation with a potential supplier.

## What's the Difference Between an IPO and a PIPE?

An initial public offering (IPO) represents the first time a company's securities are sold on a public stock market. In a PIPE, the stock is already available on public markets, but private equity investors make a deal to buy the stock at a discount from the issuer. Although the price is lower than the market price, PIPE agreements are faster than public offerings and face fewer regulatory hurdles.

## What's the Difference Between a PIPE and a Private Placement?

A private placement is a deal where shares are sold to a small number of pre-selected buyers, rather than being sold on a public stock market. This is common for smaller or privately-held companies that do not qualify for public offerings. A PIPE (Private Investment in Public Equity) is a type of private placement, except the company selling the shares already trades on a public stock exchange. In order to be successful, issuers must sell their shares for less than market price, but this route can be more straightforward than a public offering.

## What Is a Subscription Agreement in Finance?

In finance, a [subscription agreement](https://www.investopedia.com/terms/s/subscriptionagreement.asp) is an agreement to buy shares of a limited partnership. An investor agrees to buy shares in a certain company, in exchange for a share of that company's equity. The agreement will include the time and date of the sale, the price and quantity of shares traded, and any additional terms or backout conditions for the sale.

## The Bottom Line

Private investment in public equity (PIPE) allows publicly traded companies to quickly raise capital by selling shares directly to large, accredited investors below market prices. This method offers more efficient fundraising with fewer regulatory hurdles compared to secondary offerings. PIPEs benefit companies needing quick capital for operations, expansion, or acquisitions but at the cost of potentially diluting existing shareholders' value. The substantial discounts also serve as an incentive for investors but result in less capital per share for the issuer. Overall, PIPEs can be a strategic choice for companies seeking fast funding, especially smaller public entities that face challenges with traditional equity financing routes.  

> **Article Sources**
>
> 1.  Allen & Overy. "[The Role of Private Investment in Public Equity (PIPE) in Financing SPACs Business Combinations](https://www.allenovery.com/en-gb/global/news-and-insights/publications/the-role-of-private-investment-in-public-equity-pipe-in-financing-spacs-business-combinations)."
>     
> 2.  U.S. Securities and Exchange Commission-Investor.gov. "[PIPE Offerings](https://www.investor.gov/introduction-investing/investing-basics/glossary/pipe-offerings)."
>     
> 3.  Morningstar Investments. "[PIPE Dreams: Investors Roll Dice With Private Investments](https://www.morningstar.com/markets/pipe-dreams-investors-roll-dice-with-private-investments)."
>     
> 4.  Archer. "[Archer Closing Oversubscribed PIPE as Part of $215M Investment Round Led by Stellantis; ARK & United Are Two Key Investors in the PIPE Signifying Intersection of Innovative Financial Institutions & Traditional Aerospace Investing in Disruptive Tech](https://investors.archer.com/news/news-details/2023/Archer-Closing-Oversubscribed-PIPE-as-Part-of-215M-Investment-Round-Led-by-Stellantis-ARK--United-Are-Two-Key-Investors-in-the-PIPE-Signifying-Intersection-of-Innovative-Financial-Institutions--Traditional-Aerospace-Investing-in-Disruptive-Tech/default.aspx)."