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Some investors are able to participate in private placements, where a company raises money by offering new shares. For investors to participate in a private placement, they must be suitably qualified for the offering. This loosely means that the investor must meet a certain threshold of net worth, income, or investable assets in order to participate.
Private placements may be done by private or publicly trading companies. When a public company issues shares in a private placement, the new shares are not freely tradable, but must be held for a specified period of time, and must have their trading restriction lifted by the issuer’s legal counsel before they can be sold.
Rick Rule believes that if you’re able to take part in these transactions, they could be attractive ways to take advantage of a recovery in natural resources:
Let’s define what a private placement is: a private issuance of new equity, new debt, or new warrants, from the treasury of a public or private issuer. It’s not a secondary market transaction of securities that have already been issued, but rather an issue of new treasuries that isn’t registered as a public offering.
The advantage of private placements to the participant, in a traditional equity private placement, is that you often acquire an amount of stock that would be difficult to buy in the market for a small cap stock. You get to acquire the stock on terms that are set with the issuer, and not set by the vagaries of the bid and ask in the market. You may also be able to acuqire a warrant or a half-warrant along with your shares. A warrant is the right but not the obligation to buy more shares at a fixed price. It’s this leverage in the warrant that has made Sprott Global an active participant in private placement markets for 30 years.
Increasingly, other forms of private placements have become interesting to the people who run Sprott. We have found that, particularly in Canada and the United States, the costs of running a public company are so extraordinary that for ventures requiring less than $15 million in capital, we are better off funding private companies who avoid many of these costs.
So, increasingly, at Sprott, they are investing by way of private equity transactions, or doing business in unincorporated joint ventures or partnerships. That’s particularly true where the goal is income. We find that the public ‘wrapper’ — with the ongoing expense of a public listing, including legal, audit, and Sarbanes-Oxley fees — is inefficient and reduces the amount of income that can be distributed by the company to the investor.
So one of the things that Sprott customers will be seeing with increased frequency in the next 5 years, particularly with regards to income-generating transactions, will be privately placed debt instruments from public issuers, oil and gas income opportunities, and infrastructure income from opportunities like terminals and pipelines. Theses are not publicly-trading equities, but rather, they are either shares in limited liability companies or in limited partnerships designed to funnel money directly to investors and that are exempt from filing fees, Sarbanes-Oxley, and registration statements.
Readers should know that in order to participate in placements generally, they need to have a certain level of assets based upon the type of exemption the offering utilizes. Often, investors need to have $1 million in investable assets; in some cases, the investor must be a Qualified Purchaser, meaning they have $5 million in investable assets. It will be important for investors to understand, when analyzing private placements for their own portfolios, which of these classifications they are in. That’s of course a function of their investable capital.