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Private Placement and PIPES Offerings

Private placement, as the name suggests is a non-public offering. The securities for funds are not sold to the public but through a private offering. The private offering is made to a small number of qualified investors. A Private Placement Memorandum (PPM) can also be termed as non-public offering of a public company's shares. One type of private placement is called a PIPES (Private Investment in Public Equities) Offering.

The placement is subject to the terms and conditions in the Securities Act of 1933. However, the securities that are offered do not need to be registered with the SEC (Securities and Exchange Commission). However, this is possible only if the issuance is exempted from registrations that are mentioned in the Securities Act of 1933.

Normally the private placements are offered according to rules mentioned in Regulation D. The private placement may consist of preferred stock or common stock. It can also consist of promissory notes, warrants, interests and bonds. There are certain exemptions from the Securities Act of 1933 and this allows the accredited investors to purchase securities. An accredited investor has net worth more than $1 million and an annual income that is no less than $200,000 if single and $300,000 if combined with a spouse’s income. Only 35 or less non-accredited investors can participate under these exemptions. Investors need to have very good financial knowledge and understanding so that they can evaluate the merits and risks of investing in such companies.

A PIPES deal refers to selling of publicly traded common shares of convertible security or preferred stock to private investors. These deals are a component of the primary market. For offerings made in the US they need to be registered with the SEC.

However, the attractiveness of the PIPES transactions has declined after its peak in the 1990s. These transactions are attractive for private equity investors. They become more attractive when the control investments are not very easy to execute. Companies normally use PIPES when the capital markets do not want to provide financing or other equity alternatives.

In the past, PIPES transactions provided quick access to capital for reasonable transaction costs. Major investors such as Warren Buffet have found PIPES attractive since they can purchase equity linked securities and shares at a discount. PIPES also provide an investor a chance to acquire a sizable position for a variable or fixed price instead of pushing the stock price higher. These factors make the PIPES Offering a viable alternative to the IPO when the conditions are right for both the issuing company and allowable investors.

This page was created for user generated content, a place for the public to upload articles on various topics related to going public, reverse mergers, public shells, raising capital and other financial matters. These articles are posted as basic information for the public. Various authors have written these articles and as the Tiber Creek Corporation has not verified the authenticity of the content, they make no claims or assume any responsibility for the information therein. The statements and opinions expressed here are those of the authors and/or contributors and not necessarily those of the Tiber Creek Corporation.

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