The Bridge That Leads To The Pied Piper

Throughout my career I have seen a spectrum of opportunities that seemed compelling; from alternative investments to market-linked notes. But no concept was more unique and covert than the PIPE bridge financing thesis. If you invest blindly into this type of investment product without all of the details, it could end up only benefiting those who know how it works from the inside. It becomes The Bridge That Leads To The Pied Piper.

What is a PIPE?

A private investment in public equity (PIPE) is when an institution or an accredited investor buys stock directly from a public company below market price. It is an allocation of shares in a public company not through a public offering in a stock exchange. Because they have less stringent regulatory requirements than public offerings, PIPEs save companies time and money and raise funds more quickly. PIPEs generally involve private equity funds, hedge funds and other private financial investors acquiring minority stakes in a publically-listed company, at a significant discount to the market price of the shares. A PIPE offering may be registered with the SEC or may be completed as an unregistered private placement. [1]

For private equity investors, PIPEs become increasingly attractive in markets where controlled investments are harder to execute. Companies may sometimes be forced to pursue PIPEs when capital markets are unwilling to provide financing and traditional equity market alternatives – to the point where they are almost at the mercy of the issuer. Shares are sold at a slight discount to the public market price, and the company typically agrees to use its best efforts to register the resale of those same securities for the benefit of the purchaser. [2]

Existing investors tend to have mixed reactions to PIPE offerings as the PIPE is often highly dilutive and destructive to the existing shareholder base. Depending upon the terms of the transaction, a PIPE may dilute existing shareholders’ equity ownership. The SEC has pursued certain PIPE investments as violating U.S. federal securities laws. The controversy has largely involved hedge funds that use PIPE securities to cover shares that the fund shorted in anticipation of the PIPE offering. In these instances, the SEC has shown that the fund knew about the upcoming offering prior to shorting shares. [3]

What is Bridge Financing?

This is a type of short-term loan (interim financing) for an individual or business, typically taken out for a period of 2 weeks to 3 years pending the arrangement of larger or longer-term financing. Equity bridge financing represents an exchange of capital from the lender’s side for an equity stake in a company from the borrower’s side. If the individual or business has sufficient finances to back up the requested loan amount, the bridge loan request has a high likelihood of being approved quickly. Once the bridge loan lender has approved the bridge loan request, funding can be completed within 3-5 days. [4] [5]

IPO bridge financing is used by companies going public. The financing covers the IPO costs and then is paid off when the company goes public. Banks offer Bridge accounts and Bridging Lenders will set out their maximums for deposit or equity in the asset being used as security. The interest rate may increase if the borrower does not repay the loan on time. Venture capital firms may use a convertibility clause, meaning an option to convert a certain credit amount into equity at a specified price. For example, $500,000 out of $1,000,000 can be converted into equity at $4 price per share if the venture firm decides to do so. [6]

Don’t go down The Bridge That Leads To The Pied Piper. At Ironcrest Capital Management, we strive to make sure that everyone we work with has a strong understanding of their investments. Having a good approach and focus on the most important factors before investing is key. Let us help you make the right decisions. If your current investing approach isn’t working, reach out to us so we can help.