According to a January 2006 Inc. magazine article, approximately $3 billion in private investments in public equities (PIPEs) was put into more than 300 companies with annual revenues under $5 million. PIPEs, a little known, complex financial vehicle, enable publicly traded companies to sell stock to accredited investors at discounted prices. These publicly traded companies are typically small (revenues of $2 – $10 million) and medium-sized (in terms of capitalization) firms that trade over the counter (OTC). Most of the companies that obtain funding through PIPEs go public by listing on the OTC Bulletin Board in the U.S. via a reverse merger, or by listing on the AIM, the London Stock Exchange’s international market for smaller growing companies in the United Kingdom.
Obtaining PIPE financing is significantly more complex and expensive than pursuing equity growth capital through venture capital funds or angels. It requires a “road show.” A roadshow is a series of meetings with and presentations to potential investors and brokers conducted by a company and its underwriter prior to a security offering such as an IPO. In the case of a PIPE roadshow, the company travels around the country with an investment banker or other knowledgeable securities advisor presenting directly to numerous hedge fund managers or their representatives.
The banker or advisor is responsible for establishing the relationships and handling of the logistics of the road show. However, it is still a time consuming process for the company owner. Anyone considering the PIPE route must enlist the services of a skilled advisor who is highly experienced in this area. The process will cost $200,000 to $700,000 in accounting and legal fees plus an additional 3-5 times this amount for investment banking fees. Despite the cost, for some high-growth potential companies who intend to go public at some stage, this is a highly viable source of funds.
When to use hedge funds and PIPEs. Your company has a rapid growth initiative, generates minimum revenues of $2 to $5 million, needs millions to grow as planned, and has intentions of going public.
Copyright © 2014 by Tiffany C. Wright. The above is an excerpt from the book, The Funding Is Out There! Access the Cash You Need to Impact Your Business. This book will be published by Morgan James Publishing and available on Amazon in August 2014 and in bookstores and libraries in October 2014. All information is copyrighted. No part of this publication may be used without prior authorization from the author. For an advance copy in eBook or softcover format, please visit The Funding Is Out There!