PIPEs : a guide to private investments in public equity
PIPEsA Guide To Private Investments In Public EquityBloomberg PressCopyright © 2003 Steven DresnerAll right reserved. ISBN: 1-57660-140-4 Chapter One Overview: An Emerging Market RICHARD E. GORMLEY DAVID W. STADINSKI SG Cowen Securities Corporation The Emergence of PIPES, or Private Investments in Public Equity, during the last decade has profoundly altered the capital markets landscape for small and midsized public companies. PIPEs have become a reliable, attractive source of capital for many issuers, particularly during times of turbulent public equity markets. The growing participation of varied investors in this market likewise demonstrates the appeal of PIPEs as a developing investment asset class. This chapter provides a brief overview of the dynamic emerging PIPEs market. A PIPE transaction is commonly considered to be the privately negotiated sale of a public issuer's equity or equity-linked securities to investors, where the sale is conditioned upon a subsequent resale registration statement being filed with, and being declared effective by, the Securities and Exchange Commission (SEC). This permits the immediate resale of the purchased securities upon effectiveness of the registration statement. Because PIPEs are private placements, they are governed by the guidelines found in Section 4(2) of the Securities Act of 1933, as amended, which provides an exemption from registration for an issuer's transactions that do not involve any public offering. Furthermore, SEC Regulation D (Reg D) establishes a "safe harbor" exemption applicable to the private offers and sales of securities satisfying the specific requirements of this rule. PIPE offerings are generally conducted in accordance with Reg D. In addition to the sale of unregistered securities, PIPEs also include the sale of registered securities to a limited number of investors. These placements are commonly referred to as Registered Direct Offerings and include stock placements by issuers utilizing a shelf (primary) registration statement that has been filed and declared effective by the SEC. PIPEs provide an alternative financing vehicle for public companies in circumstances in which a public secondary stock or equity-linked offering is not desirable, advisable, or possible. A PIPE financing may be compelling for an issuer in one or more of the following circumstances: * The issuer seeks flexibility for the purpose of tailoring a financing structure * The issuer wants to avoid the upfront SEC registration process for timing-related reasons * Confidentiality throughout the capital-raising transaction is an important consideration for the issuer * The issuer hopes to execute a small transaction ($5 to $50 million) on an accelerated basis * Expansion of its shareholder base through targeted marketing is an important goal for the issuer * The issuer's industry sector is out of favor in the broader public equity markets * The issuer's market capitalization is too small for a successful public equity or equity-linked transaction PIPEs are typically offered to a limited number of accredited investors and to qualified institutional buyers (QIBs). Typical PIPE investors include public crossover funds, mutual funds, private equity/ sponsor funds, hedge funds, convertible arbitrage funds, and financial institutions. Typical PIPE issuers are growth companies such as those in the technology and health care sectors, although many other types of companies in sectors such as energy, mining, manufacturing, finance and financial services, consumer products, and media utilize the PIPE market as well. Some History The PIPE market has recently experienced dramatic growth. Between 1999 and 2002, companies raised more than $60 billion under a variety of structures. While PIPE transaction volume peaked in 2000 in concert with the Nasdaq index appreciation and related technology financing activity, 2001-2002 transaction volume was robust compared to historical levels of the 1990s (see Figure 1-2). Issuers at all stages of the business cycle, including cash-generating companies, are choosing to issue securities in the PIPE market. The PIPE market as a vehicle for capital formation began more than two decades ago, when microcap companies facing uncertain financing prospects were able to secure capital from technical-oriented hedge fund investors as well as high-net-worth individual investors. With the advent in 1990 of SEC Regulation S (Reg S), PIPEs became more popular because public companies were thereafter allowed to sell unregistered securities to non-U.S. entities, and these securities could be resold into the public markets after a forty-one day holding period. These transactions were typically structured as convertible preferred equity or convertible debt with variable or reset pricing features that often resulted in a deterioration of the issuer's share price. Transaction sizes ranged between $1 million and $5 million, and the aggregate size of the PIPE market was no more than a few billion dollars. Although Reg S was an effective financing platform for many companies, it was abused by some investors and issuers. In 1997, the SEC amended Reg S in order to curb this abuse. For a detailed discussion of Reg S and its associated amendments, please refer to Chapter 5, "The Law: Legal and Regulatory Framework." By the mid- to late 1990s, the PIPE market began to mature as larger companies took advantage of the ease and certainty of financing it provided. At that time, many biotechnology companies began to finance via PIPEs because the public equity markets remained closed to them. It was then that fundamental-oriented investors began to invest in PIPEs. Today, the PIPE market is a well recognized financing vehicle through which a variety of issuers successfully raise capital and in which both fundamental and technical investors actively participate. Evidence of the PIPE market's legitimacy includes the growing participation of larger issuers and "blue chip" institutional investors such as Fidelity, Putnam, T. Rowe Price, and Warburg Pincus. According to PlacementTracker.com, a research company that tracks private placements, in 2001-2002, excluding issuers with market capitalizations of less than $25 million, the average transaction size was approximately $20 million and common stock transactions represented the largest percentage of PIPEs. Structural Considerations While the PIPE market is becoming more standardized each year (the proliferation of "plain vanilla" common stock structures is an example of this trend), it remains a highly negotiated marketplace. PIPEs can be structured in various ways depending upon an issuer's objectives and profile: * Common stock (may include warrants) * Convertible preferred stock (convertible into a fixed or variable number of shares; may include warrants) * Convertible debt (convertible into a fixed or variable number of shares; may include warrants) * Structured equity line Common stock PIPEs, which are commonly referred to as plain vanilla or straight equity PIPEs, are typically issued at a discount to the issuer's current stock price. Convertible preferred stock and convertible debt structures are typically issued at an issuer's current stock price or at a premium to an issuer's current stock price. Structured equity lines are based on an issuer's stock price, volume, and trading characteristics. Convertible preferred stock, convertible debt, and structured equity lines are each referred to by some market participants as "structured PIPEs." According to PlacementTracker.com, in terms of the number of issues, common stock transactions accounted for approximately 59 percent of PIPEs in 2002, whereas in prior years convertible preferred stock and convertible debt offerings were more prevalent. Common stock structures are expected to comprise the majority of all PIPEs in the future. The trend toward common stock issuance has been caused, in part, by higher-quality, larger companies entering the PIPE market and by the widely publicized adverse effects of "death spiral" or "toxic" convertible PIPEs in several high-profile transactions. These complicated securities, issued primarily by companies in dire need of funding, had negative consequences for both investors and issuers in the wake of the stock market collapse in 2000. In many cases, these issuing companies were heading toward bankruptcy prior to the issuance of their securities, and these death spiral/toxic securities played a large part in sealing their fate. Death spiral/toxic transactions are typically structured as convertible securities with variable conversion pricing ratios, allowing investors to convert a fixed dollar amount into a floating share amount with no pricing floor. Downward movements in issuers' stock prices are often exacerbated by the existence of these variable conversion features, allowing investors to purchase larger and larger portions of a company's equity while severely diluting the holdings of existing shareowners. In the current market, issuers are primarily raising capital using common stock structures, or by using convertible structures with a fixed share conversion price, often at a premium to the issuer's current share price. The eventual structure used by a PIPE issuer largely depends on its financial and business profile prior to the transaction, and on its technical trading characteristics. The flexible nature of PIPEs affords many companies the ability to raise funds in a targeted, customized fashion; however, the terms of such financings can vary significantly, depending on the profile of the issuer. Sample terms for both common stock and convertible preferred stock/convertible debt PIPE structures are outlined above. A recent adjunct to PIPE structures has been the emergence of Registered Direct Offerings, which are stock placements by issuers who have, prior to the transaction, filed a registration statement that has been declared effective by the SEC. These offerings refer to the sale on a best efforts basis of registered common stock (usually at a slight discount to the issuer's current share price) generally to a limited number of institutional investors, whereupon the issuer files a prospectus supplement with the SEC prior to completing the offering. Registered Direct Offerings are technically public offerings with all the related considerations and requirements; however, given the generally limited distribution and negotiated nature of the transaction, the offering resembles a PIPE. Many PIPE investors have an interest in purchasing Registered Direct Offerings. Documentation Documentation for PIPES typically consists of a Securities Purchase Agreement, a Registration Rights Agreement, a Warrant Agreement (if applicable), and a legal opinion. Securities Purchase Agreement: Sets forth the agreement between the issuer and the investor pursuant to which the investor will purchase the securities of the issuer. Terms typically contained in the Securities Purchase Agreement include issuer representations and warranties, investor representations and warranties, covenants, closing conditions, and a schedule of purchasers. In addition, either the Securities Purchase Agreement or a separate Registration Rights Agreement will set forth an agreement between the issuer and the investor by which the issuer undertakes to have the securities that are being issued in the PIPE offering (or, if the securities issued in the PIPE transaction are convertible securities, the securities underlying such convertible securities) registered with the SEC. An issuer will typically commit to file a resale registration statement with the SEC within a reasonable amount of time after the closing of the transaction and agree to use its best efforts to have the registration statement declared effective after a defined period of time. (Although the amount of time in which an issuer agrees to have the shares registered can vary, the registration statement covering the securities underlying a PIPE offering would typically be required by the investor to be declared effective within 60 to 120 days following the closing.) In addition, if the issuer is offering convertible securities, it may be necessary for the issuer to amend its certificate of incorporation or prepare a certificate of designations setting forth the rights, powers, and preferences of the new class of securities. Warrant Agreement (if applicable): Sets forth the terms under which the investor will have the right to receive additional securities of the issuer. Terms typically contained in the Warrant Agreement include warrant exercise terms, covenants, representations of the holders, and conditions of transferability. Legal Opinion: Addresses the issuer's ability to enter into a binding agreement with the investor in connection with the issuance and sale of securities pursuant to the terms of the Securities Purchase Agreement, as well as the legality of the sale of securities. The investor may also request a statement to be included in the legal opinion from the issuer's counsel with respect to the accuracy of the issuer's public filings or offering materials. Issuers The PIPE issuer universe is dominated by small-cap and midcap growth companies, although an increasing number of companies with larger market capitalizations have begun to utilize PIPEs. According to PlacementTracker.com, based on the number of issues, during 2002 approximately 63 percent of issuance came from the technology and health care sectors. Health care PIPE issuances began to proliferate in the mid-1990s, led by biotechnology companies, voracious consumers of capital who were all but shut out of financing opportunities in the traditional public new-issue market. Today, biotechnology companies still dominate health care PIPEs, although there is growing issuance by medical technology and health care services companies. Similar to biotechnology companies, technology companies began to enter the PIPE market in the mid-1990s. Today, companies in virtually all major subsectors of technology, such as software, electronics, and communications, are issuing securities in the PIPE market. In addition to technology and health care, there continues to be interest by traditional industries in financing through the PIPE market. Examples include issuers in the industrial, financial, consumer, energy, and mining sectors, and others shown in Figure 1-6. Investors The PIPE investor universe is broadly divided into two groups: fundamental investors (public crossover funds, mutual funds, private equity/venture capital funds) and technical investors (hedge funds, convertible arbitrage funds, and financial institutions).Continues...Excerpted from PIPEs Copyright © 2003 by Steven Dresner . Excerpted by permission. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.
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PIPEs
A Guide To Private Investments In Public EquityBloomberg Press
Copyright © 2003 Steven DresnerAll right reserved.
ISBN: 1-57660-140-4
Contents
About the Editors..............................................................................................................................................ixAbout the Contributors.........................................................................................................................................xiAcknowledgments................................................................................................................................................xviiIntroduction Steven Dresner, The PIPEs Report.................................................................................................................1Part One The Business of PIPEs1 Overview: An Emerging Market Richard E. Gormley and David W. Stadinski SG Cowen Securities Corporation......................................................92 The Marketplace: A Statistical Summary E. Kurt Kim, PrivateRaise, LLC.......................................................................................253 Structured PIPEs: A Historical Perspective James F. O'Brien, Jr., Promethean Capital Group, LLC.............................................................514 The Players: Issuers, Investors, and Agents Steven Dresner, The PIPEs Report................................................................................93Part Two Regulatory Landscape and Structural Alternatives5 The Law: Legal and Regulatory Framework James R. Tanenbaum and Anna T. Pinedo Morrison & Foerster, LLP......................................................1096 Fundamental PIPEs: Typical Structures and Transactions Eleazer Klein, Schulte Roth & Zabel, LLP.............................................................1697 Registered PIPEs: Registered Direct Transactions Joseph Smith, Feldman Weinstein, LLP.......................................................................211Part Three Deal Flow8 Investing in PIPEs: Finding Opportunity and Evaluating the Deal Lawrence Goldfarb, BayStar Capital..........................................................2359 Managing Risk: Deal Structures and Trading Strategies Steven Winters, Gemini Investment Strategies, LLC.....................................................25310 PIPE Dreams and Realities: A Venture Capitalist Looks at the Marketplace Daniel Burstein, Millennium Technology Ventures Advisors, LLC.....................27311 Case Studies in Fundamental PIPE Investing: A Merchant Banker's Perspective Keith M. Rosenbloom, Commonwealth Associates...................................28312 Due Diligence: Caveat Emptor Squared Stewart R. Flink, Crestview Capital Funds.............................................................................301Afterword: What's Next in the PIPEs Market Monty Cerf, Bear Stearns & Co., Inc................................................................................331Glossary.......................................................................................................................................................341Index..........................................................................................................................................................359
Excerpted from PIPEs Copyright © 2003 by Steven Dresner . Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.
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