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General Market Commentary
More Details on Private Placements
In part three of the series, "All About Private Placements," Maurice Jackson of Proven and Probable talks with Tekoa Da Silva, a financial adviser with Sprott USA, about details of private placements, including removing restrictive legends, exercising warrants, timing of private placement tranches, and understanding corporate share structures.
Maurice Jackson: Thank you for joining us for the third part of a special four-part series entitled All About Private Placements. Joining us for conversation is Tekoa Da Silva. He's an accomplished licensed financial adviser for Sprott USA, the premier name in the natural resource space. Full disclosure, the following is not a Sprott USA endorsed product and it is for educational purposes only.
Tekoa, we concluded the second part of this series with the question regarding legend removals. Now what if I have an online discount broker? Can I go to them and have my legend removed?
Tekoa Da Silva: Looking at it from a North American context, a person may have a brokerage account with Charles Schwab, Fidelity, TD Ameritrade. The best place to get the answer that question is by calling them and asking the adviser that the person works with. And the answer that they get will probably result in you having to speak to three or four people at that firm to get a precise answer and it may be an imprecise answer at that. My impression is that many of the broker dealers, certainly in the U.S., are continuing to cut out the services that they used to offer because they're no longer considered core products and services, and the cost of offering those services is going through the roof in terms of compliance and legal.
So why deal with it? From their standpoint, I think it makes much better sense to just simply let those services and those people go. But a person can always ask and they can always try. My observation and my discussions with a few people that have tried some of those discount online brokerage firms in the past was that it was a real run around, sort of like spending a week at the DMV.
So if someone has some time to kill and they want to pursue that process, by all means. But my advice would be to vet out a couple firms that claim to be specialist, natural resource and private placement capable firms, and test them out and see how they go. But be careful with trying to do private placement activities with discount brokers.
Maurice Jackson: I've gotten the legend removed and I now have the ability to sell my shares, but also the price has increased. Let's use this scenario that we discussed earlier with Novo Resources Corp. (NVO:TSX.V; NSRPF:OTCQX). I bought it at 66 cents. The warrant, I can exercise it for one year at 90 cents, and the stock price is now at $7. How do I exercise this warrant?
Tekoa Da Silva: Exercising a warrant obtained by private placement. So, the broker that you use, who hopefully shows themselves to be very competent and really knows their stuff, will have a specific procedure laid out to you where they can say, "This is the form that you need to fill out." Well, I'll come back to that in just a second, but they'll say, "This is the form that you need to fill out here saying deliver us the funds and here's what our process is going to be once we get those two items from you." And I'll describe my observation of how that process works, but first I'll say if we go back to here's the form that you need to fill out to exercise your warrant, I would say when a person wants to participate in a private placement, they get an agreement called a subscription agreement from the issuer.
It's a 30 or 40 page document. If you look at the end of that document, there's usually a page right in there. It's an appendix page usually and it says exercise warrant or warrant exercise form. They'll include it right in there sometimes and you look at it and you basically write the certificate number of your warrant certificate in there, you sign it and you deliver that with the funds to the issuer. So you can forward the processing fees to the issuer by bank wire and then send them the warrant exercise form. I believe they have any ability to exercise your warrant without them actually having possession of the original warrant certificate because they'll just cancel out the number once they exercise it.
And so that's one way to do it. Another way to do it is if the broker says, "Here's how you exercise it, you can give us these forms. Here's how you give us the cash and then we'll take care of it for you." They would essentially be doing the same thing, using their clearinghouse bank. If their clearinghouse bank has your warrant certificate deposited in a vault, that just means that they'll have somebody go in there and pull out the certificate, put it with some funds and then send it to the issuer that way. And then the issuer, they get started with their legal process working with the transfer agent and having the stock certificate. If you're exercising the warrant to buy common shares, they'll get to work to create the stock certificate at the transfer agent. And then once that stock certificate is produced, you're back at step number one with regard to depositing traditionally or your regular deposit process with stock certificates have been obtained by private placement and your broker will have that instruction set out for you.
So the transfer agent will exercise for you. They'll either drop it inside a DRS advice or the Direct Registration System account held at the transfer agent or they can have it, the paper, shipped to you directly in the mail. But either way you want to get that back to the broker so that they can start the process of being able to prepare those common shares, to be sold for you on the open market.
Maurice Jackson: Are there restrictive legends on the warrants?
Tekoa Da Silva: This is where having a competent broker can come in because the broker may say, "Okay, here's the warrant exercise form, but also here is the legend removal form too. Send to us the legend removal form with the warrant exercise form so that we can have the restrictive legends removed at the same time or build it into our process to save you time." And they may say save you time and I think in most cases they could really mean it because saving time means saving four to six weeks. A question on time, it takes probably two to three weeks to have a warrant exercised and the process complete and have a common stock issued. And then this whole deposit process, my experience has been in that probably takes between four to six weeks to get a physical certificate deposited into a brokerage account and then it cleared through the legal review process.
Maurice Jackson: Are there any benefits of participating in the first tranche versus a second or third tranche?