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For Whom The PIPEs Chime: You May Be Very Surprised …
Tags: 10mm, 1mm, arbitrage, billions, cpa, due diligence, exploration companies, financings, hedge fund, investment strategies, million dollars, portfolio companies, private investor, seed stage, stage investors, stage venture, stanton, traditional venture, venture capital investments, venture capitalists,Pages: 8
Language: english
Created: Tue Dec 6 14:10:21 2005
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For Whom The PIPEs Chime: You May Be Very Surprised
A few million dollars in early/seed-stage venture capital may
be a lot easier to obtain than you think, but you have to know how to do it.
___________________________________________________________________________
Ever wonder where those billions in hedge fund dollars invested into 207 PIPE transactions for non-
everyone' talking about are really going? You might
s biotech/pharma and non-oil, gas, and mineral
be surprised to learn that it' not all ending up in risk
s exploration companies with less than $1MM in annual
arbitrage, directional trading, and other exotic revenues, and $925 million during the same period for
investment strategies conjured up by the wizards of 122 of the same type companies with between $1MM
Wall Street, and that a lot of it is actually finding it's and $5MM in annual revenues. What' more is that
s
way into early/seed-stage venture capital investments. this money is available to these companies in greater
You might be even more surprised to learn that getting amounts and much faster than it would be through
a few million dollars of it for your own company may traditional venture capitalists or organized angel
be very possible. Just ask John D. Stanton, a former networks. It also generally comes following much less
CPA turned private investor that has managed to in the way of due diligence than is usually the case with
complete financings exceeding $10MM in the other early/seed-stage investors, and, in most cases,
aggregate for three of his portfolio companies over the without any associated board seats or other control-
past year, all of which are in the development-stage and related requirements. Better still is the fact that
only one of which had previously generated any management need not have already founded a company
meaningful revenues. Most of this money came from that sold for hundreds of millions of dollars, graduated
hedge funds. from the Harvard Business School, been an academic
scholar in the Electrical Engineering and Computer
And Mr. Stanton' goods ... for virtually any Sciences Department at Berkeley, or have a close
fortune is not unique. development-stage relative that' a partner at Goldman Sachs in order to
s
Increasingly over the past company in an have a good chance of getting some of this money; in
several years, there has some cases, in fact, management need not even be
been a very significant exciting, fast- seasoned.
development in the growing sector, or
financing of early/seed- with a business Sounds great, right? Well ... there is one small catch.
stage technology and other that is otherwise The company has to be public. The term "PIPE," in
companies, and one which scalable, there' as fact, is an acronym for `private investment in public
is drawing increasing equity.'
interest from many private
whole lot of money
companies in need of such out there that' s Oh, well, you' no doubt thinking ... that' a very
re s
financing. Whereas readily available. different story. And indeed it is. For most
traditionally the only development-stage private companies, the idea of being
sources of financing for these types of companies public means first having to "go public," a highly
other than friends, family and so-called "angels" were coveted event hoped for in the future but unlikely to
the elitist venture capital firms, there are now many occur anytime soon. And, practically speaking, any
hundreds of small and large hedge funds that are financing alternative which requires that a company
actively seeking out and financing these types of first be public would likely be viewed by management
companies through what are known as PIPE of any private company as akin to them having to be
transactions. much more profitable in order to be eligible for a bank
loan; the qualifying hurdle itself would be just as much
While originally a financing option almost exclusively of a challenge if not a greater one as their primary
utilized by biotech, telecom, and oil, gas, and mineral objective. However remote the odds, institutional
exploration/mining companies because of the heavy venture capital, in fact, might be seen by these
reliance in these industries on very substantial capital individuals as a more likely source of whatever funds
investment requirements, PIPE money is now flowing they need.
in fast and furious not only to companies in these cash-
guzzling industries, but also to operating companies in What' very interesting, though, is that this isn' really
s t
all of the various technology sectors as well as many true; not even close, in fact. While, to be sure, a PIPE
other more traditional, non-tech sectors. Since January isn' an option for a neighborhood flower shop, a
t
1st of this year, in fact, and not including transactions of printing house, or a local home builder, for virtually
less than $1MM, approximately $1.9 billion has been any development-stage company in an exciting, fast-
1
growing sector, or with a business that is otherwise majority of these companies while at the OTC level are
scalable, there' a whole lot of money out there that'
s s "public" only in the most literal sense that their stock is
readily available. While ascertaining what that figure is publicly-traded; in terms of their size, scale, structure,
exactly is basically impossible because these funds are public float, trading volume, and corporate and
all private, it is clear from the level of actual investment financial sophistication, they are scarcely different than
activity that it' in the billions. And although the VC
s most small private companies.
industry certainly has billions of its own to invest, the
reality is that the overwhelming percentage of VC funds Although, to be sure, there are many PIPEs being done
are not being applied to $1-5MM slugs into Series A or by companies on the Pink Sheets, most of the nanocap
common stock rounds of early-stage companies; most venture capital type PIPEs activity these days involving
of them are being applied to $10-30MM slugs into technology and other operating companies is focused
Series C or D rounds of later-stage growth companies. on OTCBB companies. This is true for essentially two
reasons. First, there tends to be somewhat better
"Well ... yeah, OK, but ... public?" Yes, public, but liquidity in OTCBB securities than those in the Pink
not everything is always what it seems. When most Sheets as a result of
people think of public companies, they think of bulls generally higher average
and bears and large, multinational corporations with trading volumes of the
... . although it' s
household names like Boeing, General Electric, Proctor securities quoted, which by no means a
& Gamble, PepsiCo, Microsoft, Motorola, or Citigroup. means that investors have cinch, becoming
They think of the Dow Jones Industrials, the New York a better chance of being a publicly-traded
Stock Exchange (NYSE), NASDAQ, or the American able to more readily sell
Stock Exchange (Amex). But this is only the proverbial their large positions as and
company that' s
tip of the iceberg. What most people aren' aware of is
t when they want. Second, eligible for a
that there is a vast subterranean universe of over 10,000 in order to be eligible for PIPE financing
very small public companies out there in an oft quotation on the OTCBB, isn' nearly as
t
misunderstood arena known as the OTC (an acronym companies must have their
for "Over-The-Counter"). financial statements difficult as most
audited periodically and would expect.
The OTC is a market for securities of companies that be "fully-reporting" under
are somewhere between getting some traction on their the federal securities laws, which means that they must
way to the big time (i.e. the NASDAQ, Amex or file with the U.S. Securities and Exchange Commission
NYSE), on the one hand, and lost and forgotten, on the (SEC) annual 10-K reports, quarterly 10-Q reports, 8-K
other. While the NASDAQ is technically part of the reports for certain events, as well, in most cases, as
OTC market, it' not what most market-savvy types
s proxy statements for shareholder votes. This is in
understand to be the OTC. To them, the OTC means marked contrast to the Pink Sheets, for which no such
the market comprising the OTC Bulletin Board (or requirement, or any similar requirement, currently
"OTCBB" as it is more commonly referred to), an exists. While there are some companies on the Pink
electronic quotation system owned and operated by Sheets that are required to be fully-reporting because
NASDAQ which quotes securities of some 3,300 they have either previously filed a registration
nanocap and other microcap public companies, on the statement with the SEC or have 500 or more
one hand, and the Pink Sheets, a privately-owned shareholders and total assets of $10 million or more,
electronic quotation system which quotes securities of their obligations to be fully-reporting in this regard
over 7,000 similarly small public companies, on the arise under the federal securities laws, not under any
other. To a lesser extent, the OTC also encompasses requirement imposed by the Pink Sheets. And although
certain other non-U.S. markets as well, including the more than a few companies quoted on the Pink Sheets
Toronto Stock Exchange (TSX) Venture Exchange and that are not SEC-registered, fully-reporting companies
the London Stock Exchange Alternative Investment are nonetheless consistently making publicly available
Market (AIM). While the overwhelming majority of the same type of information as they would if they
the issues quoted in the OTC are technically "penny were, they are doing so strictly voluntarily and are
stocks," a term commonly associated with fraudulent under no legal obligation (except maybe contractually
schemes, dubious promoters, and, in any case, very with their investors) to continue to do so. From an
risky business, the fact of the matter is that most penny investor' perspective, OTCBB investments are
s
stock issuers are perfectly legitimate, albeit small, preferable, therefore, because there is considerable
companies. Moreover, while it is very possible for comfort to be found in knowing that current
OTC companies to eventually graduate to NASDAQ or information is required under the law to be made
one of the national exchanges, and many do, the vast
2
continuously available about a company and that much The other way to become public is by doing what has
of it has been passed upon by a reputable auditor. come to be known as a "reverse merger." This is a
transaction whereby a private operating company is
So how is all of this relevant to owners of a private (usually indirectly) merged into a public shell company
company? The answer is that many private companies (i.e. a company with no or nominal operations or assets,
that would otherwise never even consider going public but with quoted securities and some public float),
in the traditional sense are doing so these days solely thereby causing the formerly private operating
for the purpose of being able to tap the PIPE market company, through a bit of legal alchemy, to itself
approximately 53 since the beginning of this year alone. become public. While considerably more complex than
And, although it' by no means a cinch, becoming a
s SEC registration because of their transactional nature,
publicly-traded company that' eligible for a PIPE
s reverse mergers offer a variety of advantages as a
financing isn' nearly as difficult as most would expect.
t means by which to become public, including an
There are essentially two abbreviated time frame (two to four months generally)
different ways to do it, "... the capital and, in most cases, having market makers already in
neither of which involve markets are place and an existing secondary market post-closing for
what most people think of virtually closed the company' securities, which isn' always an easy
s t
as a traditional IPO. Of thing to manufacture on demand, and, in some cases,
great interest to most that
to small private can take years to develop.
might consider this route, companies these
moreover, is the fact that, days, while they While historically the vehicle of choice for
depending on how the are rife with unscrupulous penny-stock promoters engaging in
deal is structured and who "pump-and-dump" schemes, and having suffered a
the service providers are
opportunity for reputational taint as a result for many years, reverse
that are involved, it is companies that mergers have gained wide-spread recognition and
often possible to greatly are of the same acceptance in recent years as a very legitimate means
minimize the required size but public." by which to go public. In a recent (July 15, 2005) and
cash outlays associated very significant Final Rule Release, in fact, the SEC
with the process prior to closing on the PIPE and expressly acknowledged in discussing reverse mergers
receiving the proceeds with which to finance it. that it "recognize[s] that companies and their
professional advisors often use shell companies for
The first way to become public without doing an IPO, many legitimate corporate structuring purposes." And,
and the simplest, is to voluntarily register with the SEC. as virtually every piece of literature that' been written
s
The registration process can be one which registers about reverse mergers over the past decade has pointed
either (i) a sale of securities as part of a primary out, it was by way of reverse merger that a number of
offering by the company as well as a class of the very large, well-recognized names in corporate
company' securities for purposes of enabling a
s America have come to exist, including Occidental
secondary market in those securities (which is precisely Petroleum, Turner Broadcasting, and Acclaim
what occurs in a traditional IPO, though on a much Entertainment.
grander scale, and involving a team of investment
bankers / underwriters), or (ii) a class of the company' s While reverse mergers offer certain advantages over
securities solely for purposes of enabling the secondary straight-forward SEC registration, there is no question
market. In both cases, the extent of the information that the costs associated with reverse mergers are
required to be included is pretty much the same; it is higher. This is largely attributable to the direct cost of
also quite extensive, including audited financial the public shell company itself which must be
statements. As part of this process, it is also necessary purchased and which, depending on a variety of factors,
to recruit at least one market maker for the company' s including whether it' a Pink Sheet shell or an OTCBB
s
stock and prepare and submit certain documentation in shell, can cost anywhere from approximately $100,000,
order to obtain a stock symbol for the company and get on the low end, to upwards of $800,000. Depending on
the stock quoted on either the OTCBB or the Pink the same factors identified in relation to SEC
Sheets. Depending on such factors as whether such registration, becoming public through reverse merger is
audited financial statements are already available, the likely to cost a total of approximately $200,000 to
size of the company, and the size of the law and $900,000.
auditing firms engaged, becoming public through this
method is likely to cost a company somewhere in the NGM-Tec, Inc., a development-stage voice biometrics
range of $35,000 to $200,000. In any case, it generally company based in New Hope, Pennsylvania with only
takes four to six months to complete the process. nominal revenues to date, is currently in the process of
3
reverse merging into a Pink Sheet shell company in
order to become public. Jeffrey D. Randol, NGM- PIPEs: The Deal-Speak
Tec' Chief Executive Officer, commented that "the
s
capital markets are virtually closed to small private As with most areas of corporate finance, the business
companies these days, while they are rife with of PIPEs is marked by its own lexicon. The following
opportunity for companies that are of the same size but are a select few of the most basic terms that you should
public. The decision to become public was not a hard know if you' thinking of doing a PIPE:
re
one for us." NGM-Tec hopes to complete a PIPE of at
* Restricted Securities: Securities the resale of
least $2.5 million by the end of this year. which has not been registered, and which may or
may not be eligible for resale under Securities Act
For any company that makes a determination to become Rule 144. Generally, securities issued in PIPE
public one way or the other in order to pursue a PIPE transactions are restricted securities.
financing, it would be well-advised to make sure that it
arrives dressed for the dance. Depending on the * Registration Rights: Rights granted to investors to
company, this can require any one or more of an array compel the issuer of restricted securities they hold
of potential corporate structural changes and related to register the resale of such securities.
actions, often including such things, for example, as
* Convertible Security: Any security, typically a
making sure that the company is authorized to issue preferred stock, note or debenture, which the
what is commonly known as "blank-check" preferred holder may convert into an equity security of the
stock, possible reincorporation in Delaware (typically same issuer, typically common stock, during a
from one of the so-called "penny stock states" including specified term based on a certain conversion price,
Nevada, Utah, Idaho, or Colorado), certain which may be either fixed, subject to reset, or
capitalization restructuring in order to increase the variable.
number of shareholders and shares in the public float,
getting a stock symbol, and getting quoted. These types * Structured PIPE: A PIPE involving some type of
security other straight common stock.
of considerations are best explored in consultation with
qualified securities counsel. * Discount / Premium: The difference between the
open market trading price of a given security and
So what is a PIPE exactly and how does it work? In its the effective price paid by a PIPE investor for
most basic form, a PIPE is really very simple. It' any
s restricted shares of the same security expressed as
private placement (i.e. unregistered sale) of securities in a percentage of the former.
a public company that involves a commitment on the
part of the company to immediately register the resale * Warrant Coverage: The extent of common stock
of the shares (or the shares into which they are purchase warrants included in a PIPE transactions
expressed as a percentage of the overall stock
convertible if convertible securities are involved) after
being issued in the transaction.
the closing. The array of structural variations that
PIPEs take on, however, is quite broad and * Fixed Price: A purchase/conversion price that is
sophisticated. While many PIPEs at the OTC level fixed (subject to certain standard adjustments)
merely involve the issuance of common stock, many either at or prior to closing, or on a specified date
others involve convertible preferred stock or following the closing.
convertible debt with either a fixed conversion price, a
reset price, or a variable price [see inset: PIPEs: The * Reset Price: A purchase/conversion price that is
Deal-Speak]. originally fixed (subject to certain standard
adjustments) either at or prior to closing, or on a
specified date following the closing, but which is
More elaborate still are so-called "private equity lines." subject to adjustment (upward or downward)
Although not technically in the same immediate family based on various criteria including fundamental
(because their resale is actually registered with the SEC performance, the occurrence of a specified event,
before they are sold to the investors), private equity or the achievement of a certain market trading
lines are more than a distant cousin to PIPEs, and price threshold for the company' stock within a
s
always included as a practical matter in any discussion stated period following the closing.
of the various types of PIPE structures. Under these
financing arrangements, companies are able to draw * Variable Price: A purchase/conversion price that
down funds on an as-needed basis, subject to certain fluctuates in relation the price of the company's
stock following the closing (typically with a
limitations. As their name implies, they work ceiling).
something like commercial credit lines, with the key
distinction being that draw-downs under a private
4
equity line result in the issuance of equity as opposed to PIPE deal, as well as the corresponding strike price and
debt. term, can vary significantly and, in any case, are subject
to negotiation. Generally, however, warrant coverage is
Whatever the structure, the price paid by investors in a in the range of 10-50%, warrant terms run 3-5 years,
PIPE transaction is generally tied to the trading price of and strike prices are 100-300% higher than the market
the company' common stock on the open market,
s price of the underlying stock as of closing and/or the
typically at either some discount or premium, effective price of the common stock being acquired in
depending on the type of security involved; common the transaction. Many warrants, moreover, include call
stock is generally sold at a discount and convertible provisions pursuant to which the company may compel
securities are generally sold at a premium. At the OTC the investor to either exercise them or have them
nanocap level, discounts are often involved with any cancelled if and when the trading price of the stock hits
type of security and can be quite substantial, depending and maintains for a specified period a certain minimum
on the average trading volume of a company' stock,s threshold. Whatever the specific terms, the warrant
ranging from approximately 10% on the low end to as piece in a PIPE transaction has come to be viewed by
high as 50% or more for a very thinly-traded stock many of the hedge funds that invest in these
(which are common at this level). In order to minimize transactions as an important component. By selling the
dilution, however, well-advised companies will common stock position that they originally invest in at
generally limit the size of initial PIPE transactions to a a modest profit in the near-term (following conversion
minimal amount they determine will be needed to if convertible securities are involved), and then holding
achieve certain developmental milestones in the hope the warrant(s) on a more speculative basis for the
that their stock price will increase in the meantime and greater upside potential over the longer-term, these
allow them to do a second (or perhaps third or fourth) investors enjoy the benefit of a true hedging
follow-on PIPE following achievement of those opportunity.
milestones at a then higher valuation. In any case, and
because of the short-term arbitrage opportunity it The vast majority of PIPE transactions are highly
presents, the discount in a common stock PIPE syndicated, involving anywhere from several to as
investment is one of the principal features that make many as thirty or more different investors at a time,
them attractive to the hedge fund community in general, often inclusive of several high net-worth individuals in
and particularly to the majority in this community addition to the hedge funds. There will typically be a
which tend to be guided by more of a trading mentality lead investor which negotiates the pricing and other
than a long-term investing mentality. terms of the deal, conducts the due diligence review,
and whose counsel typically drafts the deal documents
For purposes of illustration, in a plain vanilla (although the company, it should be noted, will always
development-stage technology common stock PIPE have to pay the associated legal fees). The other
transaction, an OTCBB-listed company with, say, 25 investors then come aboard on the basis of the pre-
million common shares outstanding and a $.40 trading negotiated deal. Note that, because they involve a
price per share will sell and issue 6,250,000 common somewhat delicate legal structure, private equity lines
shares at a price of, say, $.32 per share (i.e. a 20% differ significantly from true PIPEs in this regard, never
discount) for a total purchase price of $2MM. In such a involving any more than a single investor.
transaction, the investors would receive the 6,250,000
common shares, the company would receive $2MM in Whether a PIPE involves an investment firm acting as a
fresh working capital, and the existing shareholders of placement agent to syndicate the deal will largely
the company would be diluted by 20%. depend on the size of each of the company and the deal
involved. To be sure, though, intermediaries of one
Most often, and almost invariably for those involving kind or another are often involved in PIPE transactions,
development-stage companies, PIPEs also involve the even at the microcap/nanocap levels.
issuance at no additional cost to the investor of one
or more warrants to purchase additional common stock As noted previously, a distinguishing feature of most
for a given period at some stated price. The inclusion PIPEs is the commitment on the part of the company to
of these warrant "kickers" (as they are known) is immediately register the resale of the restricted shares
intended to incentivize investors by "sweetening" the issued in the transaction (or the shares into which they
deal somewhat with additional upside, on the one hand, are convertible if convertible securities are involved).
and incentivizing management to get the stock price up In those deals which include warrant coverage, the
in order to compel holders to exercise and bring in more resale of the shares underlying the warrants, and in
cash for the company, on the other. The number of some cases the resale of the warrants themselves, are
underlying shares covered by warrants in any given registered as well. The fulfillment of this obligation
5
requires the preparation and filing with the SEC by the may be to their stock price, PIPEs allow these small,
company of a registration statement, invariably within a developing companies to obtain significant amounts of
contractually mandated timeframe. While it is pretty cash at times when it is very often critically required
standard in these deals for the company to have a and otherwise unavailable, and any negative effect on
relatively short period in which to first file the their stock price is likely to be only temporary.
registration statement (generally 30-60 days following Strength and vitality, after all, probably shouldn' be the
t
the closing), the deadline for getting the registration biggest concern to those gasping for air.
statement to be declared effective by the SEC, which
means the shares can actually be sold, can vary from For companies that aren' already public, potentially the
t
approximately 90 to 180 days. Because a company has biggest risk associated with doing a PIPE, however, is
only limited control over this process (because of the indirect, arising out of the company' transition to
s
SEC' involvement), these time frames, and the
s becoming public. This is a very involved issue, and one
associated penalties which become payable by the which raises a number of considerations. Among the
company in the event of any delays in meeting them most significant of these is the escalating cost
(which can be quite severe), are among the most associated with merely being public, which includes
intensely negotiated points in the context of a PIPE SEC reporting, Sarbanes-Oxley compliance, D&O
transaction. Interestingly, despite a growing number insurance, and investor relations, among other things.
of PIPE investors with a decidedly longer term VC-type At a minimum, these expenses are likely to run a few
perspective than traditional hedge funds (thereby hundred thousands dollars per year. And under no
rendering immediate registration rights logically circumstances, of course, would a company want to
irrelevant), there is never any corresponding slack on find itself in a position where such costs constitute the
the imposition of these registration rights penalties. margin preventing it from being profitable. Further, the
The liquidity afforded PIPE investors through virtually distraction that invariably accompanies the additional
immediate registration is a key characteristic in and very time-consuming responsibilities on the part of
distinguishing this type of investment activity from management in maintaining a public company can also
traditional private equity venture capital, and even those become a very real impediment to productivity and is
PIPE investors with a relatively long-term view and no something to seriously consider. Beyond these issues,
present intention of selling their stock place a high there are a variety of others associated with becoming a
degree of importance on this as a Plan B exit strategy. public company as well that private company owners
should think carefully about, including those relating to
Are there any downsides to doing a PIPE? Of course the potential loss of control, disclosure obligations that
there are, some real and some perceived. By far, the may provide competitors with otherwise confidential
most significant direct downside of doing a PIPE is information, increased exposure to liability for officers
that, because they are most often done at a time when a and directors, restrictions imposed on certain actions of
company' stock price is relatively low, which means
s management, limitations on trading by management
the purchase discounts will be relatively high, they and major shareholders due to short-swing profit
result in greater dilution to existing shareholders than liability rules, and general market pressures to manage
any of them would probably like (although, as for the benefit of short-term stock performance.
previously noted, it is possible to minimize this effect
through careful planning). What' more, in addition to
s And, although it is unquestionably true that a great
the downward pressure on a company' stock resulting
s many companies are becoming public these days one
from any equity offering (attributable essentially to way or another in order to take advantage of the PIPEs
shareholder perceptions relating to dilution) and the market, it should be noted that making a decision to
increase in market overhang from convertibles and/or become public in order to do a single round of
warrants, a company' stock price is very likely to be
s financing is probably not a very wise idea. Any
on a fairly sustained and significant sometimes even decision to become public should be motivated by some
sharp decline following effectiveness of the combination of the variety of different advantages
registration statement and during the subsequent period actually being public has to offer, which, in addition to
that the PIPE investors are selling off their positions, a significantly higher valuation and greater access to the
which can last for a period of up to two years. While capital markets generally, include the following, among
certainly undesirable, and frequently cited by PIPE others:
critics as reason enough to avoid them altogether, this is
a natural effect of having large blocks of stock being * Heightened visibility and image that can
sold into the market, and should be expected. potentially provide an advantage over privately-
Moreover, it' important to bear in mind when
s held competitors;
considering these transactions that, whatever the result
6
* The ability to make acquisitions using the
company' stock as currency, and on the basis of
s Where' The PIPE Action?
s
the higher public valuation;
Exclusive of the many PIPEs being done in the
* The ability to attract and retain more qualified biotech/pharma and oil, gas and mineral exploration/mining
executives and other employees because of sectors, the following is a list of where PIPE activity is
occurring in 2005:
incentive compensation packages that involve
liquid securities; and
Tech Products / Services Non-Tech Services
* Liquidity for existing shareholders.
IT/Systems/Enterprise Construction
Software Healthcare
Further still on the negative side are those who will tell
Data Storage Telecom
you that doing a PIPE is anathema ... an option of last Consumer Software Media
resort for those for whom the bells toll. These critics Medical/Dental Enironmental
cite the sharp and sustained decline in many companies Equipment/Devices Financial/Banking/
IT Insurance
stock price following a PIPE transaction as evidence to
Hardware/Semiconductors Hospitality/Gaming/Food
support their conclusion that these transactions are Military/Defense & Beverage
merely vehicles for the sophisticated hedge funds that Aerospace/Aviation Business/Industrial
invest in them to steal money from the market by Navigation Recreational/Travel/Leisure
Automotive Shipping/Transportation/
orchestrating and engaging in massive naked (illegal)
Electronics Logistics
short-selling campaigns from offshore accounts, Telecom Other
thereby sending the stocks of these companies into - Wireless Diversified
irreversible nose dives, and, eventually, oblivion. The - Cable/DSL/Broadband
- VoIP (Voice) Non-Tech Industrial
facts are, however, that, (i) as previously explained,
- VoIP (Video) Products
these price declines are the inevitable consequence of - Prepaid products, etc.
the sell-off by investors following a PIPE registration, - Diversified Chemical
and (ii) the extent to which naked short-selling actually Media/Multimedia Building Products
Internet
occurs in this arena, and its effect on stock-pricing, are
- Online Business Non-Tech Consumer
highly controversial issues and the subjects of intense Services Products
debate among some of the most highly informed - Online Consumer
securities market professionals, regulators, and other Services Food & Beverage
Energy/Environmental Apparel/Designer Lines
experts.
Security/Biometrics Health & Beauty
Lighting Education/Training
The more moderate detractors contend that the Education/Training Recreational/Sporting
predatory and very short-term trading mentality of Materials/Plastics Goods
Robotics Sports/Entertainment
hedge fund investors that dominate the PIPEs market is
Nanotech Diversified Books/Magazines
the kiss of death for early-stage companies, which need Healthcare Household/Furniture
long-term, value-oriented investors in order to thrive Nutraceuticals Diversified
and flourish. And while there is no question that there Photography/Video/Audio Other
Recreational/Leisure
is some truth to this assertion, it is equally true that a
Games/Toys Retail / e-tail
great many companies do, in fact, come to thrive and Financial
flourish after having completed a PIPE financing. Of Shipping/Transportation/ Food & Beverage
relevance here is the fact, noted previously, that there Logistics Apparel and Accessories
Highway & Transportation Health & Beauty/
are an increasing number of funds out there these days
Safety Pharmaceutical
that are investing in early/seed-stage PIPEs with a Law Enforcement Entertainment
decidedly longer-term approach, some of which Agritech (Music/Movies/Books)
provide, in addition to their capital, much of the same Oil & Gas/Mining Recreational/Sporting
Chemicals Goods
type of strategic added value that has traditionally been
Other Industrial Discount
associated with venture capital firms, not hedge funds. Multi-Industrial
It will be interesting to see over the next few years how Other Consumer International Trade
the beneficiary companies of this developing breed of Diversified
Diversified
VC-type PIPE financing end up performing in the
`thrive and flourish' category.
7
Finally, one criticism that pretty much everyone would company' stock price, and it may all even be true in
s
agree on surrounds the use of so-called "death spiral" or the short-term, but we' in this for the long haul and
re
"toxic" convertible PIPE structures which, because of a that cash made a world of difference in allowing us to
distinguishing floorless reset feature that relates to their continue to pursue our business plan. The way we see
conversion price, can not only result in the pre-PIPE it, if we stay focused on building a strong brand and
shareholders of a company getting diluted down to company, the stock price will eventually take care of
nothing, it can also powerfully motivate the holders of itself." "And if for any reason it doesn' Malone
t"
the death-spiral securities to endlessly short the stock, added, "we' buy back all of the shares at the low price
ll
thereby bringing about that result in fairly short order. and do just fine."
Though quite prevalent about five years ago, and
entirely worthy of the harsh criticism they have Now that hardly sounds like the kind of talk you' d
received, they don' hold any real relevance today
t expect to hear from one for whom the bells toll, but
because they have all but disappeared entirely from the rather, perhaps, from one ... well ... for whom the
current PIPEs landscape. PIPEs chime.
So, then, is it all worth it? Steven Malone, CEO of _________________
FindEx.com, Inc. (OTCBB: FIND), a leading Bible
software publishing company with annual revenues last
year of approximately $5.5 million, thinks that it is. Michael M. Membrado is a principal in the law firm of
Having gone forward with a $1.75 million PIPE M.M. Membrado, PLLC in New York, which specializes
transaction for FindEx in mid 2004 despite some in corporate finance and securities and which
trepidation, Malone believes that his company is much represents many private and public companies as well
better off for having done it. "It gave us the capital we as investors. The firm' Website can be found at
s
needed to retire all of our debt and invest in new www.mmmembrado.com.
product development and marketing" says Malone.
"You can talk all you want about how the PIPE guys
© November 2005 Michael M. Membrado
take advantage of small companies that are hard up for
cash, and how these deals negatively impact a
8