By Lee Sherman
If you’re tired of waiting for the next blockbuster initial public offering (IPO), there’s an alternative that allows you invest in a publicly traded company now.
Called private investment in public equity (PIPE) it is available to private investors when either a company or its employees offer either common shares or some form of preferred stock or convertible security for sale. A PIPE can include common stock, convertible preferred stock, warrants, and other kinds of securities. PIPE deals are a way for high-growth companies to raise a large amount of capital quickly. PIPE transactions have traditionally been used by companies with significant capital requirements like those in life science, biotech, real estate investment trusts, and increasingly technology companies. PIPE deals are available to investors at below the current price available to the public.
In order to qualify for this type of investment you must be an accredited investor. That means you earned more than $200,000 a year as an individual or $300,000 with your spouse for the last two years running, or you have a net worth over $1 million, or you hold a Series 7, 65 or 82 license in good standing.
How to find a PIPE
So how do you find these deals? You can’t just ring up a company and ask to invest. The startup scene is dominated by existing venture capital firms and a number of high-profile angel investors who already know each other. It’s very difficult for new funds to get on a company’s cap table, let alone a private investor. If you are an accredited investor that is ready to invest, consider such online platforms as EquityBee, LiquidStock and EquityZen. They act as matchmakers between fledgling investors and startup employees who want to exercise their stock options early. For these employees, this can be a good way of minimizing potential downside risk, while for the investor, it is a way to get in on a hot startup that would otherwise be unavailable.
These deals typically become available when the company valuation has fallen and it is looking for new sources of capital. Preferred stock is typically made available at a discounted rate so it can be thought of as a kind of fire sale.
Ask yourself why these deals have become available. Do these unnamed and unknown employees of the company know something about its chances that you don’t? Because there is little in the way of disclosure required by the SEC (as there is with an IPO) so you should factor this into your analysis. And remember that these deals are only available to those that meet what are to some, fairly stringent requirements. That said, if you are accredited and the shareholders have approved the sale, you may be in a position to acquire a significant stake in a pre-IPO startup in an accessible way and at a bargain basement price.
Lee Sherman contributes to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Lee is an experienced journalist and editor with over 30 years of expertise with a significant history of writing in the personal finance and technology arenas.