"The PIPE market emerged in the first quarter as the leading provider of equity capital for small-cap and mid-cap public companies," said Brian Overstreet, president of DirectPlacement.com. He added that the appeal of the PIPE market is that companies can raise capital in as little as 30 days versus the month-long road shows required for initial public offerings.

By contrast, only 20 companies accessed the IPO market, although they raised $7.9 billion, according to CommScan/Computasoft Research Ltd.

PIPE securities are normally issued by public companies with market capitalizations of less than $1 billion, generating proceeds of $25 million or less. The majority of PIPE offerings have been conducted by public companies in cash-dependent high-tech or biotech industries.

Especially in the telecom sector, PIPE investments of private equity firms have not performed well. As the stock of public market telecoms tanked, their stock prices sank below the conversion trigger of the convertible preferred instruments held by many private equity firms, essentially putting the investments under water.

PIPE offerings typically take one of two forms, either "traditional" or "structured" instruments.

Traditional PIPEs usually include the sale of the issuer's common stock to an investor at a specified discount to the current market price, or the sale of a security that converts into the issuing company's common stock at a fixed rate that can include warrants. Traditional PIPE investors typically include pension plans as well as venture capital groups and private equity firms.

Of traditional PIPE offerings, 117 were completed in the first quarter to total $1.1 billion.

Some recent traditional PIPEs include Auspex Systems Inc.'s $90 million sale of discounted common stock, Learning Tree International's sale of $141 million of discounted common stock and United Therapeutics Corp.'s $143 million sale of discounted common stock.

Structured PIPEs tend to be more complex, taking the form of convertible debentures, convertible preferred stock, common stock with resets, or structured equity lines, including warrants. A reset provision within a structured PIPE gives the investor the right to reset the initial conversion or purchase price to a discount to the market price at the time of the reset, offering protection against a down market. A "toxic" effect for issuers can occur when a structured PIPE allows an investor to receive common stock at an ever-increasing rate while the company's common stock price is falling.

Recent structured PIPE offerings include eToys Inc.'s sale of $100 million of convertible preferred stock with attached purchase warrants; MicroStrategy Inc.'s sale of $125 million of convertible preferred stock; and Quokka Sports Inc.'s sale of $76.9 million convertible promissory notes with attached purchase warrants.

In the first quarter, 50 structured PIPE transactions amounting to $1 billion were completed. Some 41 of those were structured equity line investments, with nine floating-price or reset-price convertible PIPE offerings.

The structured equity line commitments include an agreement by IGEN International Inc. to sell up to $60 million of common stock to one institutional investor.