Growing in popularity as a source of investment capital—and in controversy —are PIPES (private investment in public equity).

A sum of private money is used to buy a stake in a public company in need of funds from sources other than a secondary public offering. That stake can be in common or preferred stock, convertible bonds, or warrants. The financial instrument is purchased at a discount, which gives the PIPE investors an interest in the company, and gives the company the additional capital it needs.

In an example reported by the Wall Street Journal, the chairman of a seller of manufactured housing was approached by a group of investors offering to lend his business millions of dollars. In return, the investors would get bonds that could be converted into common stock and a nice interest rate.

“We thought it was a smart thing to do,” said the chairman. The company was able to borrow $65 million at about 2 percentage points less than it could otherwise have done.

PIPES, as private deals, are usually kept confidential, because this kind of transaction dilutes the stock by the big investors who have bought at a discount. In fact, when the shareholders in the manufactured housing company learned of the deal, the stock slid nearly 11 percent.

Clearly, PIPES pose an investor relations problem, and must be handled carefully. On the one hand, it helps a company with needed capital. On the other hand, by diluting the stock it hurts the other shareholders. This is a minefield that must be traversed gingerly, with the announcement of such an investment—necessary under the Rules of Disclosure—made precisely and carefully, and with the flow of information carefully monitored.