Regulation FD, which is now known as Reg FD, was enacted in 2000 in order to deal with the issue of selective disclosure of material nonpublic information by public issuers of securities. Reg FD was designed to create a level playing field between institutional and individual market participants. The fair disclosure rules of Reg FD prohibit a company from revealing material nonpublic information to selected investors without disclosing that same material to the public at the same time. While material nonpublic information does not have an exact definition under the regulations, most investment professionals would agree that corporate information can be viewed as material if there exists a substantial possibility that a reasonable investor would consider the information as important in making an investment decision. Information can be viewed as nonpublic if it has not been disseminated in a way that makes it available to all investors at the same time. Thus, a private placement of securities by an issuer in most instances would be a material fact.
Because the fair disclosure regulations would apply to public companies conducting any type of private offering, the information that companies are able to disclose to potential investors during the PIPE marketing process is restricted to publicly available information. However, through the use of confidentiality agreements, potential investors at times expressly agree to keep the information that the issuer is considering an equity offering in confidence until the transaction has been publicly announced or terminated. So a potential investor in a private investment offering for a public company would not be allowed to trade in the issuer’s securities prior to such an announcement or termination of the offering. After a PIPE funding has been agreed to, the public issuer would be required by SEC guidelines and fair disclosure regulations to publicly disclose the transaction. Typically, an issuer would file a current report Form 8-K and issue a press release regarding the funding. It is the Form 8-K filings and press releases that provide a fertile opportunity for micro cap investors to discover potential candidates in the micro cap arena. This is a very useful screening technique when looking at micro cap opportunities.
Private investments in public equities would be considered smart-money transactions. The investment professionals who are in a position to make a large private investment in a public company will typically have extensive industry and investment knowledge and will see there an opportunity that may not be apparent to the broader equity markets. In addition, because these investors may have a limited time frame, particularly in the case of technical investors, it is possible to construct a series of logical assumptions that would lead to an end point or exit strategy for a typical PIPE investor. There are several good venues for obtaining information on PIPES and private equity deals. Of course, the SEC, in its daily filing reports, would allow an investor to download and review all 8-Ks filed by public companies. Although this is a cumbersome process, investors who monitor such activity on a daily basis become fairly efficient at weeding through 8-K filings. However, there are several private databases available via the Internet that provide information about equity private placements. PrivateRaise.com is a web site that compiles statistics about private investments in public equities. The transactions on the web site are contained in a database that includes Rule 144A PIPE transactions, registered direct PIPE transactions, and non–rule 144A transactions. The database also documents the issuance of any equity or equity-linked security of over $1 million in nominal value that has been executed by a public company domiciled in the United States or public foreign-based company that has its primary trading listing or a significant trading presence on any of the U.S. stock markets. Equity and equity-linked security-type structures included in the database are common stock, convertible preferred stock, nonconvertible preferred stock that has warrants attached for common stock, convertible debt and nonconvertible debt with warrants attached for common stock, prepaid warrants, and equity lines of credit. This is a useful resource if you are going to seriously consider a focus on PIPE transactions as part of the micro cap screening process.