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Don’t let the troubled markets fool you — companies are still selling stock when they need money. Instead of selling large blocks of shares in a public, secondary offering, companies are turning to private investors and calling upon their corporate lawyers to structure more complex deals. Take Restoration Hardware Inc. for instance. The publicly traded, Corte Madera, Calif.-based retail chain raised $24.5 million this week by selling shares to a group of select investment firms, some of whom typically invest in private companies. Because it’s a private transaction, the investors cannot yet sell their shares publicly. For them to do that, the shares have to be registered with the Securities and Exchange Commission, and that takes another month. But in exchange for agreeing to buy illiquid stock, the company gave the investors a discount on what the market is offering for the shares. The pace of these so-called PIPEs — private investment in public equity — is picking up again for companies looking for growth capital, say corporate lawyers. This follows a slump in such deals that paralleled the stock market’s decline over the last 12 months. For tech lawyers in particular, the financial instrument may become more common as clients that went public last year or staged a secondary offering before the market’s fall run out of cash and start looking for more. “With the market downturn, the appetite for public offerings in most sectors is just gone, but investors still have money,” said Charles Ruck, a Latham & Watkins partner. So far this year, companies have scored $4.6 billion by selling stock through 287 PIPE transactions, according to DirectPlacement.com Inc., a San Diego firm that tracks such deals. If the deals continue apace, PIPE deals could pull down $7 billion by the end of the year. That may not sound like much when compared to the $25 billion investors pumped into public companies through 1,210 PIPE deals in 2000. But 2000, according to Brian Overstreet, president of DirectPlacement, was an aberration. “Last year was just a very freaky year. We’re not seeing companies doing the fantastic deals,” he said. The pace of PIPE deals is more on par with 1999, Overstreet said. In that year, companies raised $7.9 billion through 671 PIPE deals. There also are some key differences between the kinds of PIPEs getting done last year and the ones closing this year, Overstreet said. “A lot of companies raised money just to stay in business,” said Overstreet. “Companies are now raising capital for more growth-oriented things.” PIPEs were popular before the market meltdown because stock prices were so high. Big institutional investors — who were not traditional PIPE players — sought discounts on the inflated prices, hoping to notch a bit more profitable return. Now, the deals are making a comeback as long-time PIPE investors look for bargains, and market-shy companies seeking capital attempt to avoid secondary offerings. In the past 12 months, Ruck has done about 20 PIPE deals. Representing both issuers and investment banks, he has worked with the SEC to help ease the filing process. Even with the SEC component, there are a number of reasons why a company would choose to do a PIPE instead of the next most logical option of a secondary. For one thing, secondary offerings are more expensive to pull off. They require paying investment banking fees and doing a road show similar to the song and dance that companies stage for prospective investors in initial public offerings. And stock market investors hammer the company’s stock when they learn a secondary is in the offing because it will bring more shares to market and increase supply. But a sky-high market meant secondaries could pull in immense sums of cash — making them a lucrative and popular choice. Now that stock prices are down, companies would rather face negotiating a discount of 5 to 20 percent with a private buyer instead of weathering a hostile market. “This is sort of an under-the-radar-screen capital raising,” said Ruck, who is doing a brisk business with the transaction. Investment banks are lining up companies for PIPEs in the fourth quarter of this year, said Overstreet. That’s when companies may be willing to offer deeper discounts to investors who also may be getting itchy to put money to work. “It’s becoming an interesting option for a lot of companies whose stock is in the tank,” said Jorge del Calvo, a Pillsbury Winthrop partner. “In the past we would have just done a secondary and moved on. This is much more interesting.”

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