The PIPE’s (Private Investment in Public Equity) industry is smoking. According to a recent NY Times article some 800 deals worth over $18 billion have been financed so far this year. If you are interested in keeping track of the PIPE marketplace I suggest you check out the “Company News” section of Sagient Research: Sagient publishes some fine independent research articles and reports. Sagient also has a product called PlacementTracker, a dynamic, customizable research service that provides clients with market data, research, and analysis on the PIPE market. Launched in 1999, PlacementTracker has become nationally recognized for its coverage of the PIPE market.

PIPE’s are the mechanism that funds most of the reverse shell merger deals. The PIPE is structured as a private placement, at a discount to the market, either as debt instrument with a conversion into equity or as straight equity. In either case investors receive registration rights that allow them to have freely tradable shares after the reverse merger has been completed. IF the reverse merger and the PIPE have been coordinated correctly then the investors usually profit handsomely. It takes a significant period of time to finalize these types of transactions.

The real risk/reward opportunity is for investors to purchase shares of the new company shortly after the reverse merger is completed. Investors will usually be able to purchase free trading stock, at a huge discount, based upon the valuation of the old company. The biggest risk to the investor in this type of investment is having the experience to review all aspects of the deal including, but not limited to, the value of the company backing into the shell, how the reverse merger will affect the total number of shares outstanding and the pricing of the proposed PIPE. The new company will, in most cases, perform a reverse split of the existing shares of common stock. The extent of the reverse split will determine the true price you paid for your shares. So, if you paid $.05 per share for 100,000 shares and the new company performed a 10 for one reverse split your new cost basis would be $.50 for 10,000 shares.

Investors will have to examine the SEC filing sof the existing company prior to the reverse merger, to determine the total number of shares outstanding. The financials of the new company that is vending into the shell will determine how much of a reverse split will take place to warrant their desired trading price. The other area of consideration is the issued and outstanding number of shares and the percentage of the old company’s stock being delivered to the new owners. If they are delivering over 98%, there is little convern fo rthe “float” of the remaining 2% affecting the tradiing and performance of the new company’s stock. Hoewver, if there are 100 million shares outstanding and they are delivering 98%, there are still 2 million share left in the float. In this case look for at 10 to 1 reverse split resulting in 10 million shares outstanding iwth only 200,000 shares in the float. As you are beginniing to se, the final capitalization and valuation on all of these deals is determined by how well the new company handles the nuances of the reverse merger.

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