Private Investment in Public Equity (PIPE)

In a PIPE, a listed company raises capital by selling securities privately to accredited or institutional investors rather than through a public offering. Structures include traditional PIPEs (common stock or preferred at a fixed price, often at a discount to market, sometimes with warrants) and structured PIPEs (convertible notes or preferred with resettable conversion prices). PIPEs are also a standard financing source alongside SPAC business combinations. Because the securities are unregistered when issued, the issuer usually agrees to file a resale registration statement within a set period; until then they are restricted.

Hedge funds, private equity funds and crossover investors use PIPEs for discounted entry into listed companies. The purchase agreement typically covers price, registration rights, lock-ups, standstill provisions and, for convertibles, conversion mechanics and anti-dilution protection.

How funds account for PIPEs. The investment is carried at fair value from the trade date. Before registration, shares are valued from the listed price of the unrestricted stock, and the treatment of transfer restrictions must follow the applicable standard: under US GAAP, ASU 2022-03 clarified that a contractual sale restriction is not considered in measuring fair value, whereas a restriction that is a characteristic of the security itself may be. Warrants and conversion features are valued separately with option models, usually Level 2 or Level 3. The valuation policy should be agreed with the auditor before the first PIPE is booked.

Pitfalls. Typical issues include booking the position on the funding date rather than the trade date, missing the date the securities become freely tradable (which changes the valuation input and the security master record), mis-valuing embedded warrants, and not processing conversions or reset events. Material non-public information during PIPE negotiations also requires compliance oversight and trading restrictions.