We are a leading provider of private placements for junior natural resources companies, which are available to qualified U.S. investors.
Private placements are investments in companies seeking additional capital, generally available only to institutions and certain sophisticated retail investors. The companies offering private placements may be publicly traded or privately held. When a publicly traded company issues stock through a private placement, it may also be referred to as a “PIPE” (a Private Investment in Public Equity).
These are the private placement offerings we at Sprott Global most frequently make available to our clients. While the company’s stock continues to trade publicly, the shares issued in the private placements are typically restricted from sale or transfer for a specific time period. The restriction period and terms depend on the jurisdiction of the issuing company and the applicable regulations, with restrictive periods varying from 40 days to 12 months.
As an added incentive for investors to consider participation in private placements, the issuers often include warrants with the common stock. When an issuer includes warrants as part of a placement, they will typically issue a half or full warrant for each common share purchased.
A warrant is the right, but not the obligation, to purchase a share of common stock at a specified price (the “Strike Price” of the warrant) any time prior to the Expiration Date of the warrants. Expiration dates are commonly two to five years from the date of the private placement.
If the stock price does not exceed the warrants’ strike price during the life of the warrant, the warrants simply expire, with no additional advantage or disadvantage to the private placement investor. If, during the life of the warrant, the stock price meets or exceeds the strike price of the warrant, the warrant holder may purchase common shares from the issuer (“exercise the warrant”) at the strike price, and either sell the common shares on the open market (if a market exists for the shares) or hold them until a later date.
In some cases, warrants may be separated from the common stock, allowing the investor to simply sell warrants without having to exercise them.
Some investors choose, at some point, to sell their originally purchased common shares on the open market and retain the warrants. One of the risks of this strategy is that the warrants typically have a limited life, so if the share price does not reach the exercise price of the warrant before the expiration date of the warrant, it expires worthless.
Depending on market conditions, issuers may price private placement shares below market price in order to attract investors who could otherwise purchase the shares on the open market without the additional risk of holding restricted (illiquid) shares during the hold period.
Private placement investors must be comfortable with the fact that their shares will not be tradable for the entire duration of the restriction period. The investors will not be able to sell their shares in the event of a cash need, or enter sell orders in response to market price fluctuations. Investments in private placements should only be made as part of a “buy and hold” strategy.
Private placement investors are typically issued restricted shares that require additional paperwork and processing prior to their conversion to “freely-trading” shares. The investor is responsible for safekeeping fees and other charges associated with the physical certificates and their conversion to free-trading shares.
Some issuers do not allow the restrictive legend to be removed from a physical certificate until AFTER the investor has sold the shares. In these cases, investors do not have “clean” shares available to settle the sell transaction until up to a few weeks after the date of the sale.
The investor has the risk of being forced to repurchase the shares if they are not able to deliver them in a timely manner. This repurchase, or “buy-in,” has to be done at current market prices, which can result in significant costs.
Additionally, proceeds from a sale of restricted securities are not available to the client (for other purchases or for cash disbursement) until the restrictive legend has been removed from the certificate.
In order to participate in private placements, a U.S. investor must meet the conditions to be considered an “Accredited Investor” under SEC regulations. There are a number of ways to meet this requirement, but for individual investors, the most common is to have $1 million in net worth (exclusive of the value of the investor’s primary residence) or $200,000 in recurring annual income ($300,000 for joint accounts with a spouse). Investors not meeting the Accredited Investor requirement may not participate in private placements, nor may they be solicited for participation in a private placement by a U.S. broker-dealer or representative.
Private placements are not suitable for all Accredited Investors. Due to the illiquid nature of restricted securities and the often speculative nature of the stock being issued, investors should carefully consider their risk tolerance, liquidity (cash) needs, investment time horizon (how long they are comfortable holding a position), and the overall investment objective of their portfolio before considering participation in any private placement offering.
You and your broker and/or other financial advisors should discuss the pros and cons of private placement investing thoroughly before making a decision to participate.
For Accredited Investors with the appropriate investment goals and risk tolerance, private placements can be opportunities to participate in financings that are not widely available.
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