SPACs and private investment in public equity

Although special purpose acquisition companies (SPACs) are not new, their popularity has soared in recent years. In fact, SPACs have already raised more money in 2021 than in all of 2020, which itself was a record-breaking year (SPACs raised $83.4 billion in 2020).

While SPACs are capable of raising massive amounts of capital, they often set their sight on even larger targets. In such instances, SPACs may turn to private investment in public equity (PIPE) to raise certain additional capital that they need before they can close on the de-SPAC transaction.

Traditionally, PIPE is exactly what it says: a private placement of a public company’s securities with a single investor or group of investors. In this transaction, investors enter into private purchase agreements with the public company for its securities, sometimes with (but more and more often without) the assistance of a placement agent. Upon sale, the securities are restricted, meaning that their resale is limited. Generally, the investors are granted registration rights, and/or the company agrees to file a resale registration statement, which allows the investors to resell the securities to the public. Some PIPE transactions are even conditioned on Securities and Exchange Commission (SEC) approval of the resale registration statement.^[1]

In the context of a SPAC, PIPE is a method that allows the SPAC to raise certain additional capital from private investors to ensure that the SPAC has enough funds to close on the acquisition of a target company and/or to enable the SPAC to satisfy certain minimum cash conditions that are required by the target company before the de-SPAC transaction closes. The PIPE transaction and related funding usually occurs at the same time the SPAC merges with its target company, providing the SPAC much needed liquidity at closing.^[2]

The terms of a PIPE transaction vary. Generally, the SPAC offers common stock to the PIPE investors at the same price offered in the SPAC’s IPO (which is usually $10). The SPAC may instead offer preferred stock (or even debt securities) that is convertible to common shares; an increasing number of SPACs are choosing to sell convertible securities in PIPE transactions.^[3]

PIPE transactions sometimes include special provisions to protect the PIPE investors. These provisions might include: (i) consent rights for major corporate actions, (ii) anti-dilution provisions, (iii) conversion and redemption features, (iv) preemptive rights, and (v) rights to nominate members of the board of directors. In the event some or all of these provisions are included in the transaction, the company may also impose certain restrictions on the PIPE investor(s), including (i) transfer restrictions, (ii) lock-ups, and (iii) standstills. And, because PIPE typically dilutes the current shareholders of the SPAC, SPACs sometimes offer warrants to their initial shareholders to account for any such dilution.^[4]

PIPE investment may require shareholder approval. Specifically, where the PIPE transaction requires a new type of security, shareholder approval is needed to amend the applicable corporate documents. Additionally, certain stock exchanges (e.g. the NYSE and NASDAQ) require shareholder approval if the terms or size of the PIPE transaction meet certain thresholds. Because of the difficulty involved in securing shareholder approvals, companies often structure the transaction to delay or entirely avoid such approvals. For example, the company may issue securities to the PIPE investors that are only convertible after shareholder approval, thereby delaying the need for such approval.^[5]

PIPEs are recognized to be more cost-efficient and time-saving than secondary, registered offerings because the SEC accords them less regulatory oversight. A SPAC might obtain capital from a PIPE in as little as two to three weeks, much shorter than it would wait in a secondary, registered offering. And, after it sells the securities, the SPAC typically is able to register them within a month.^[6]

For any questions related to SPACs or PIPEs, please contact one of the attorneys listed below.

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