TheCorporateCounsel.net

As this recent Wilson Sonsini memo explains, private investments in public equity (PIPEs) and registered direct offerings (RDOs) can be attractive paths to capital during times of market volatility. Here are a few of the pros & cons:

PIPEs and RDOs can be good alternatives to traditional underwritten offerings, particularly during periods of market volatility, because they can be negotiated discreetly and publicly announced after the parties agree to terms. However, given the lack of company leverage (usually) and near-term illiquidity of the securities sold, the cost of capital is typically higher for PIPEs than underwritten offerings.

Because an investor receives freely tradable securities in an RDO, the securities are typically sold at a smaller discount to the current market price of the company’s common stock in an RDO than in a PIPE; in 2024, the average discount for PIPEs surveyed was 6.2% while RDOs surveyed priced the securities at an average premium of 2.0% above market price.

The 43-page report summarizes trends in these types of financings, based on the 205 PIPEs and RDOs by U.S.-based technology and life sciences companies that raised at least $10 million and had at least one closing between January 1 and December 31, 2024. Here are a few key takeaways:

– The mix of transactions shifted towards PIPEs. Compared to the prior year, 2024 saw a 38.1% increase in the number of PIPE transactions reviewed, while the number of RDOs remained unchanged. This shift may be driven by the SEC’s “baby shelf” rule, which limits the ability of smaller market cap companies (i.e., those with a public float of less than $75 million) to raise over one-third of their market cap using a registration statement on Form S-3 (which provides the flexibility to finance without necessarily undergoing SEC review) over the course of the previous 12 months.

When a company wishes to sell securities in excess of this limitation, it will typically do so through a PIPE. In 2024, 42.8% of PIPEs and 56.9% of RDOs were completed by companies with a public float under $75 million; however, of these small cap companies, 87.9% of PIPEs were for over one-third of the company’s public float (which would otherwise trigger the baby shelf rules even if no other securities were sold by the company over the prior 12 months), while only 55.2% of RDOs by small cap companies were for over a third of the company’s public float. See the sections on “2024 PIPE and RDO Activity” and “‘Baby Shelf’ Rule” for additional information.

– RDOs priced their securities at a premium to market price. 2024 saw a continuation of a trend of securities sold in RDOs pricing higher relative to prior periods. In 2024, the average premium for RDOs surveyed was 2.0%, compared to an average discount of 1.8% and 3.9% for 2023 and 2022, respectively. The average discount for PIPE transactions was relatively flat between 2024 and 2023.

This trend may reflect marginally stronger investor sentiment for companies that are not subject to the “baby shelf” rules or transactions that do not required delayed liquidity through registration rights. See the section on “Security Price” for more information.

– Insiders participated in fewer transactions. In another signal that markets may be warming up again, in 2024 company insiders (e.g., directors, officers, and affiliates) participated in 18.5% of the deals reviewed, compared to 27.6% in 2023. The decrease was more pronounced among technology transactions, which saw a 50% decrease in the percentage of deals with insider participation compared to the prior year.

In challenged markets, insiders typically participate in more financings to help attract outside investors or simply to preserve the viability of a company. Conversely, a decrease in insider participation suggests an increase in the investment appetite of outside investors who generally present fewer reporting and approval requirements than when insiders are involved. See the section on “Types of Investors” for additional information.

On the topic of smaller company financings, we covered how the “baby shelf” limitation is measured in the context of an at-the-market offering in the September-October 2024 issue of The Corporate Counsel newsletter. That issue is available online to members of The CorporateCounsel.net who subscribe to the electronic format.

– Liz Dunshee