PIPE Transactions (Private investment in public equity): 9 Key Governance Considerations for Sponsors and Issuers

Introduction: What Are PIPE Transactions?

So, let’s dive into something you might have heard buzzing around in financial circles: PIPE transactions. Don’t worry, it’s not as complicated as it sounds! PIPE stands for Private Investment in Public Equity, which is just a fancy way of saying a private investor buys shares in a publicly traded company. Often, they get those shares at a discount, which sounds like a pretty sweet deal for the investor, right?

While this might seem like a simple transaction, it brings up some really important questions about who gets to control what inside the company. That’s where governance comes in. Suddenly, it’s not just about throwing money at a company—it’s about the balance of power and how decisions get made.

If you’re a company looking to raise some quick capital or an investor ready to jump into a deal, understanding the ins and outs of governance in PIPE transactions is key. It’s the difference between a smooth deal and one that leaves you with more headaches than profits.

In this blog, we’re going to break down what exactly goes into a PIPE deal, why governance is such a big deal in these kinds of transactions, and what both sponsors (the investors) and issuers (the companies) need to think about before diving in. Don’t worry, we’ll keep it simple and clear—no jargon overload.

Ready? Let’s get started!

PIPE transactions demand a careful balance between capital access, control, and governance.

1. What Makes PIPE Transactions Stand Out?

So, why are PIPE transactions even a thing in the first place? I mean, why would a company want to sell equity to private investors when they could just go the traditional route with a public offering? Well, there are a couple of reasons.

For starters, speed is a huge factor. Let’s face it—traditional public offerings can take months to complete, with all the paperwork, regulatory hurdles, and the back-and-forth between the company and regulators. If you’re a company looking for quick cash to fuel growth, launch a new project, or just survive a tough period, PIPE deals can help you raise capital way faster. It’s pretty much a shortcut compared to the public offering process, which can be a major win if time is critical.

Then, there’s the flexibility. PIPEs aren’t limited to just one type of investment. Whether it’s common stock, preferred stock, or convertible securities (you know, the stuff that can turn into common stock later on), PIPE transactions give companies a lot of room to structure the deal in a way that makes sense for their needs. Investors love the variety, and companies love the options.

And don’t forget about the discounted price! One of the main perks of a PIPE deal for the investor is the opportunity to buy shares at a lower price than what they’re currently trading for on the market. It’s like getting a special offer on a product that’s only available to a select few. For the company, it’s a way to quickly bring in capital without the long wait.

But—and here’s the catch—the thing that sets PIPEs apart isn’t just the speed or flexibility; it’s the fact that the deal often comes with strings attached, especially when it comes to governance. And that’s where things can get a little tricky.

2. Key Governance Issues in PIPE Transactions

Alright, let’s talk governance in PIPE deals. Now, I know that sounds like some corporate jargon, but stick with me—it’s actually really important.

When a company does a PIPE deal, they’re not just raising cash—they’re also bringing in investors who are going to have their own expectations. These investors aren’t just putting money in and walking away. They want a piece of the action. Maybe they want a say in the company’s big decisions or a seat on the board.

But here’s the kicker: The company still wants to run the show. They need the capital, but they don’t want to lose control of the business. So, both sides have to figure out how much influence the investors can have, while still letting the company operate the way it wants.

It’s about setting the right expectations from the start. You don’t want the company and the investors to be butting heads down the line because no one clearly outlined who has the power to make certain decisions.

At the end of the day, governance in a PIPE deal is about being upfront and honest about who gets to call the shots. No games. That way, both sides can move forward with their eyes wide open.

3. 9-Key Governance Considerations in PIPE Transactions

So now that we understand what a PIPE deal is and why the governance of a PIPE deal matters we should look at the 9 governance considerations that companies and investors need to think about when they are making a PIPE deal. The governance of a PIPE deal is really important. Both investors and companies need to consider these 9 key governance considerations when they are working on a PIPE deal.

These things are very important. They can make a deal work out well. They can cause it to fail. So it is important to do these things from the beginning. Getting the details of a deal from the start is crucial, for the deal. The deal depends on these things.

1. Authorisation of Securities

   Let us start with something very important: authorization of securities. This means the company must make sure they are legally allowed to issue the kind of stock or securities they are offering in the PIPE deal. The company has to check if they have the right to issue these securities. If the company does not have the right to issue these shares, the company will need to get approval to change their charter or structure. The authorisation of securities is a step for the company.

   
   

   Why does this matter? Well, if this is not sorted out before the deal you could run into delays or even legal issues down the road. This is about making sure everything with the deal is legitimate, from the very beginning. You want the deal to be legitimate so the deal is done properly.

   
   

2. Board Representation Rights

   This thing is really interesting. When an investor puts a lot of money into a company through a Private Investment in Public Equity or PIPE, they probably want something than just a thank you. The investor might want to be on the company's board or at least have a role where they can observe what is going on at the company. The investor wants to have some say, in the company because they are putting a lot of money into the company through the PIPE.

   
   

   Why does this matter? This is about control. Investors want to have a say in how the company is run, especially when they are putting in a large amount of money. For the company, they have to decide whether they are comfortable letting investors have a voice in decisions about the company. The company and investors have to work, and it is a bit of a dance between the company and investors.

   
   

3. Voting and Consent Rights

   This one is connected to the point. When we talk about a PIPE deal, the investor may also want voting rights. They may want to be able to block major decisions. These decisions could be things like mergers or acquisitions. The investor wants to have the power to say yes or no to moves. These big moves could affect their investment in the PIPE deal. The investor wants control over what happens with their investment in the PIPE deal.

   
   

   Why does this matter? If you are a company, you do not want someone to have the power to say no to every decision that you make.. At the same time investors want to make sure that their money is being protected. This is what it is about, finding that sweet spot where the company and the investors are both happy. The company and the investors need to find a balance so the company can make decisions. The investors can feel safe about their investment in the company.

   
   

4. Standstill and Lockup Covenants

   Here is another fun one: standstill and lockup covenants. These are basically clauses that stop the investor from doing things after the deal is made. For example, the investor may be stopped from buying shares of the company or even trying to take over the company for a certain period of time. The standstill and lockup covenants are in place to restrict the investor from doing these things. The investor has to wait for a period of time before they can buy more shares of the company or try to take over the company. The standstill and lockup covenants are important because they affect the investor and the company.

   
   

   Why does this matter? These clauses are important because they help the company stay in charge and they prevent an investor from trying to take over the business fast. For the investor, it is about making sure they are not stuck with the company shares they cannot sell for a while. It is also a way to give the company some time to think and make decisions without being rushed. The company needs this time. The investor needs to be able to sell the company shares when they want to. These clauses help the company and the investor by giving them what they need. The company gets to stay in control. The investor gets to sell the company shares when it is a good time to do so.

   
   

5. Information Rights

   Investors want to know what is going on. They probably want to get information about the company, such as statements and business reports, so they can see how the company is doing. Investors want to be in the loop and have access to updates on the company. This means investors want information rights, which is really just a way for them to get the information they need about the company, like financial statements and business reports, to see how the company is doing.

   
   

   Why does this matter? This is important because transparency is key here. Investors want to know that their money is being used in a way. The company has to find the balance between being open and not giving away too much sensitive information about the company. Transparency is very important for the company and the investors.

   
   

6. Stockholder Approval Requirements

   Sometimes the company has to get approval from its stockholders. This happens when the company is issuing a lot of stock or when the PIPE deal is really big. The stockholders will then vote on the PIPE deal to decide if it can happen. The company needs the stockholders to say yes to the PIPE deal for it to go forward. The stockholders have the power to decide if the PIPE deal is a good idea or not.

   
   

   Why does the approval matter? If the company does not get the approval, the whole deal could fall apart. The approval is a bit of a problem. The approval is something to think about before the company moves forward with the deal. The company needs approval to make sure everything goes smoothly with the deal.

   
   

7. Path to Liquidity and Exit

   Investors always think about one thing. That is liquidity. They want to know how they can get their money back and when they can do that. When it comes to PIPE deals, investors usually want to have registration rights. This means they want to be able to sell their shares of the company to the public after a certain amount of time has passed. Investors like PIPE deals because they can sell their shares of the company. PIPE deals are important to investors.

   
   

   Why does the exit strategy matter for the investor and the company? The investor does not want to be stuck holding the company shares forever.

   
   

   The company and the investor need to have an understanding of when the investor can exit the deal and how the investor can exit the deal.

   
   

   Setting expectations around the exit strategy is super important for the company and the investor.

   
   

   For the company, it needs to be prepared for the exit strategy. What the exit strategy mean for the company's stock price.

   
   

8. SEC Reporting Obligations

   When the deal is finalized, the company and the investor generally have to do some reports for the Securities and Exchange Commission. The company and the investor have to fill out forms so that the Securities and Exchange Commission and everyone else know who owns what parts of the company. The company and the investor have to do this to be transparent about the ownership of the company.

   
   

   This is important because the company and the company need to know what they have to report. The investor and the investor also need to know what they have to report. If the company and the investor do not do what they are supposed to do, they could get in trouble with the Securities and Exchange Commission.

   
   

9. Protection Against Dilution

   Here is where things can get really tricky: dilution of the investors' shares. If the company issues shares of stock in the future, the value of the investors' shares could actually go down. This is because there are shares of the company out now. To protect against dilution of their shares, investors often negotiate something called 'dilution provisions'. These anti-dilution provisions are important because they keep the investors' ownership percentage of the company intact. They make sure the investor still owns the percentage of the company as they did before the company issued more shares of stock.

   
   

   Why does this matter? No one wants their stake to get watered down over time. This is a big one for investors, and companies need to be mindful of how it might impact future fundraising or share issuance.

Challenges for Issuers in PIPE Transactions

PIPE deals are really fast and flexible. They have some problems. For companies, a big issue is finding a balance between being in charge and needing money. When you get the money from a PIPE deal you have to be careful not to give up much control over your company or let the investor have too much say in the decisions you make. This can be really tough. You might also have disagreements with the people who already own shares of your company, especially if the investor gets a seat on the board of directors or the right to vote on issues. PIPE deals can be tricky, like that. Also, there is always the problem of following all the rules. Making sure the Securities and Exchange Commission filings are done correctly. The deal follows all the legal rules can be a real hassle. The Securities and Exchange Commission filings have to be done right.

Sponsors and issuers have to deal with a lot of risks. One big risk is governance risk. This is when the people in charge do not do a job of managing things. Sponsors and issuers can do some things to make sure this does not happen.

They need to make sure they have people in charge. These people should know what they are doing. Be able to make good decisions. Sponsors and issuers should also have rules in place to make sure everything runs smoothly.

If sponsors and issuers do these things, they can reduce the chance of governance risks. This means they will be safer and have problems. Governance risks are a deal, for sponsors and issuers so they need to take them seriously and do what they can to prevent them. Sponsors and issuers should always be thinking about how to mitigate governance risks.

To avoid these problems, both sides need to have agreements from the beginning. They should talk about what they expect from each other when it comes to making decisions, how much say the board will have and what will happen if they want to leave. It is also very important to do your homework. The people giving the money, the sponsors, need to look at the company's money situation. At the time, the people getting the money the issuers need to understand what the investors want and how much they will be involved. If everyone is honest and open about who gets to make decisions, things will work better. There will be less chance of arguments later on. The company and the investors need to build trust and set rules. The investors and the company need to understand each other's goals and what they want from the investment. This way the investors and the company can work together.

The Future of PIPE Transactions

Looking ahead, PIPE deals are going to get bigger in areas like technology, healthcare and renewable energy that are growing really fast. More investors think these PIPE deals are a choice because they are quicker and easier to work with than traditional ways. As the rules change, people will pay attention to making sure everything is clear and fair for investors. We will probably see companies sharing information so they can avoid problems and make the whole process easier to understand for PIPE deals.

At the end of the day, PIPE transactions are a great way for companies to get the capital they need without going through the long and expensive process of an IPO. But understanding the governance considerations is crucial for both investors and issuers. Both sides need to strike a balance between control, influence, and flexibility. If they get the governance piece right, a PIPE deal can be a win-win situation. The key? Clear expectations, transparency, and good communication.

Our Directors’ Institute - World Council of Directors can help you accelerate your board journey by training you on your roles and responsibilities to be carried out efficiently, helping you make a significant contribution to the board and raise corporate governance standards within the organisation.