PIPE funded Reverse Shell Merger

PIPE funded deals can either be a very good thing or a very bad thing.  By the way PIPE stands for Private Investment in Public Entity. 

Good Pipe Transaction

The good is when a company has retained a brokerage firm to fund their deal PRIOR to the reverse merger taking place.  In this scenario the brokerage firm sets the initial price of the stock and raises several million dollars for the new company (the Buyer of the shell). 

When the reverse is completed the investors who purchased shares in the PIPE have their shares registered; which basically means their shares will be freely tradable within 90 days from the completion of the reverse merger. 

This is good for two reasons:

1)      the company has been properly financed

2)      the PIPE has established a price for the stock prior to it trading.

Bad Pipe Transaction

The bad is when a company has already completed their reverse merger and the stock has already started trading.  There are certain types of PIPE transactions where the funding source has purchased shares from the company (at a discount) and the sells those shares into the market to raise capital for the company causing a gradual decrease in the stock price also called “a death spiral”.  Upon conclusion of the financing the company’s stock has been hammered down to a penny stock and the company has had to issue millions of shares to complete the transaction.  At the end of the day the company’s principals no longer have control of the company because of massive dilution to their stock.