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General Market Commentary
An Inside Look at Private Placements
Maurice Jackson: Thank you for joining us for aspecial four-part series entitled All About Private Placements. Joining us for a conversation is Tekoa Da Silva; he is an accomplished licensed financial advisor for Sprott USA, the preeminent name in the natural resources space. Full disclosure, the following is not a Sprott USA endorsed product, and is for educational purposes only.
Tekoa Da Silva: Hi, Maurice, pleasure to be with you.
Maurice Jackson: There's a lot of ambiguity regarding private placements and we thought it would be good for readers to have a comprehensive overview regarding this topic. Tekoa, what is a private placement?
Tekoa Da Silva: My understanding is that it's simply a vehicle that is used to allow an investor to fund directly a corporate entity. I'm guessing in the context of this conversation, private placement is probably in relation to natural resources and mining industries. And I believe the bottom two segments of that industry, in exploration and development-stage businesses, [private placements are] their lifeline, in terms of their primary source of capital infusion.
A private placement is a vehicle used to move cash directly into the entity, and then in exchange for your cash, you get some form of security or ownership. And the securities that you could get could be common stock, they could be stock options, warrants, debt securities. So that is what a private placement generally is.
Maurice Jackson: So it allows you to get either shares or a debenture. How do I participate in a private placement?
Tekoa Da Silva: Assuming that we're talking about the North American context, and if you are, let's say, based in the U.S., an accredited investor, how would you participate in a private placement? I think if a person is sitting in front of a computer at home and they see a press release come up for, let's say, a gold exploration company, and they look at it and it says that the company is announcing a private placement and they say, how do I participate in that?, probably the first thing that a person would do, or could do, is to call the company or e-mail them and say, "I'd like to participate."
What would happen next is the company would reply and probably provide a few documents. A private placement memorandum is the lead document and they would provide that to the person to complete and return, and that would start the process of participating in a private placement. The investor relations personnel of that company would sort of hold your hand and walk you through the process of that.
Sector expert Maurice Jackson begins a four-part series on private placements with a conversation with Tekoa Da Silva of Sprott USA.
Maurice Jackson: What are the requirements to participate in a private placement?
Tekoa Da Silva: The requirements to participate in a private placement, again, from the North American context, is usually, firstly, being an accredited investor. So having a net worth of US$1 million or more, excluding the value of your main residence. There's also an income qualification part of it too, that may change over time. So you always want to look online for the most precise definition announced by, I believe it's the SEC [Securities and Exchange Commission] or FINRA [Financial Industry Regulatory Authority] in the United States.
That's usually the case. Sometimes there will be offerings that don't require an investor or a speculator to be accredited, but those are different types of offerings, and you'll want to check with the company, to ask about the specific type of offering that they have. So that's the first hurdle.
There are other hurdles that a person should consider and they have to do with participation amounts and also third-party processing fees. My experience is that it's usually between $300 to $600—the third-party processing fees, not including a brokerage commission costs—that a person may encounter if they participate in a private placement.
So if you're considering an investment or a speculation in something and your hurdle is $300 to $600 just to process it, and let's say another 1% or 2% as a brokerage commission cost of the market value of the investment, and you're thinking about it for $5,000 or $10,000—I mean really, if it's $5,000 or less, and you're putting up 10–15% of your capital just to play, in most cases, I think that's pretty unreasonable. But if you increase the amount to US$10,000–15,000 or larger, then that fraction is smaller as a percentage of your capital and maybe it's more considerable.
So you'll get your technical requirement, in terms of being financially qualified and the specific type of offering that the company is making available to the market. You have your financial requirement, your qualifications there, and then outside of that it's just jumping through the hoops, if you will, on completing the paperwork and moving the paperwork around the various parties.
Maurice Jackson: When is a good time to buy?