Relief Valve? Done right, a private investment in public equity, or PIPE, could bring your business much-needed cash.

Last fall, Kevan Casey, CEO of eLinear, had two specific near-term goals forhis Houston-based technology solutions company: 1) to get listed onthe American Stock Exchange, and 2) to expand, beginning with a newfacility in Dallas. "We wanted to get off the [OTC] BulletinBoard as soon as possible so we could get in front of largeinstitutional investors and start moving up the chain," saysCasey, 32. One requirement for listing on the Amex is a minimum of$4 million in shareholder equity, of which eLinear had just $2.6million.

With only $13.6 million in revenue for 2003, the company was toosmall for a secondary offering. So eLinear's management teamopted instead to do a Private Investment in Public Equity (PIPE).PIPEs allow public companies to do a limited distribution ofsecurities-in common stock or convertible debt-to accredited orinstitutional investors, quickly and quietly. "It's like ahybrid of private and public capital," says Steven Dresner,co-author of PIPEs: A Guide to Private Investments in PublicEquity and publisher of The PIPEs Report. It ispublic equity, but "it's much like the traditional privateequity market in that you have a select group of seasoned investorswho can look at deals and make very quick decisions," saysDresner.

Efficiency is one of the PIPE's draws. PIPEs can be executedin weeks, where a secondary offering can take months. But the tighttime frame allows for only limited due-diligence investigation ofpotential shareowners. And business owners often have to make atough choice: either discount the stock-sometimes by as much as 70percent-or offer registration rights that allow investors to sellsooner.

By closing three PIPE deals that raised more than $6 million,eLinear did both. The first, completed last December, raised $1million from about 80 individual investors who received commonstock at a deep discount but must hold the shares for at least ayear. The second and third rounds, in January and February, broughtin $5 million from mostly institutional investors-including hedgefunds, which have been notorious shorters of stock in PIPE dealsand which have recently come under the SEC microscope for illegalactivity.

And eLinear's stock initially suffered from short selling,which came as a bit of a shock to Casey. "I was under theimpression that their intentions were to grow with thecompany," he says of the round two and three investors.

Still, Casey says he wouldn't trade the compressed schedule.The capital infusion allowed the company to list on the Amex, opena new facility in Dallas and put away enough cash for severalyears. At the moment, the company is planning some largeacquisitions, which will further enlarge its footprint, and islooking at a secondary offering 12 months out.

Going forward, however, Casey says he will turn a more skepticaleye on the motivations of potential investors. "I would try toget to know them better, have more one-on-one communication aboutwhere the company's going," he says.

That kind of investigation is absolutely critical to asuccessful PIPE, notes Harlan Kleiman, senior managing directorwith New York City-based investment bank C.E. Unterberg,Towbin and author of PIPES: The CEO's Guide to Successful PrivateInvestments in Public Equities. "Money always has aface behind it," he says. "You must know the profile ofthe person who is buying that significant amount of your stock-oryour company can get hurt."

But the PIPE itself is a neutral mechanism, Kleiman adds.It's only as good as those doing the deal. It helps that morebig investment banks have been getting in on PIPE action,collectively raising $447 million in banking fees through PIPEs in2003, an 80 percent increase over the prior year, according toSagient Research Systems, a San Diego firm that tracks PIPE deals.And with $7 billion raised for companies in the first half of2004-compared with $12 billion annually for 2002 and 2003-the PIPEmarket isn't slowing down.

Once seen as the scourge of capital raising, PIPEs are not justfor troubled companies anymore, says Colin Blaydon, director of theCenter for Private Equity and Entrepreneurship at DartmouthCollege's Tuck School of Business. "It's been doneenough times by strong, viable enterprises that it can be justifiedas a sensible alternative approach to financing."

is executive editor of CEO Magazine.