Rick Rule: A briefing on private placements
Some investors are able to participate in private placements, where a company raises money by offering new shares. For US investors to participate in a private placement, they must be suitably qualified for the offering. Suitability depends on the exemptions under the Securities Act of 1933 through which the company is able to offer new shares. 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, myself included. We have found that, particularly in the United States, the costs of running a public company are so extraordinary that for ventures requiring less than $50 million in capital, we are better off funding private companies who avoid many of these costs.
So, increasingly, at Sprott, we are investing by way of private equity transactions, or we’re doing business in unincorporated joint ventures or partnerships. That’s particularly true where our 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.
If you are an US accredited investor, you can complete and return this form, which will enable you to hear about our upcoming opportunities. If you are an investor from another jurisdiction, please contact us at (760) 444-5298/email[email protected] to learn more. Note private placements involve risks, as the companies that are financed can perform poorly, and can be highly illiquid.
P.S.: Not a subscriber? Click here to get Sprott’s Thoughts, and you’ll also receive a free electronic copy of the Sprott Gold Book.
This information is for information purposes only and is not intended to be an offer or solicitation for the sale of any financial product or service or a recommendation or determination by Sprott Global Resource Investments Ltd. that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on the objectives of the investor, financial situation, investment horizon, and their particular needs. This information is not intended to provide financial, tax, legal, accounting or other professional advice since such advice always requires consideration of individual circumstances. The products discussed herein are not insured by the FDIC or any other governmental agency, are subject to risks, including a possible loss of the principal amount invested.
Generally, natural resources investments are more volatile on a daily basis and have higher headline risk than other sectors as they tend to be more sensitive to economic data, political and regulatory events as well as underlying commodity prices. Natural resource investments are influenced by the price of underlying commodities like oil, gas, metals, coal, etc.; several of which trade on various exchanges and have price fluctuations based on short-term dynamics partly driven by demand/supply and nowadays also by investment flows. Natural resource investments tend to react more sensitively to global events and economic data than other sectors, whether it is a natural disaster like an earthquake, political upheaval in the Middle East or release of employment data in the U.S. Low priced securities can be very risky and may result in the loss of part or all of your investment. Because of significant volatility, large dealer spreads and very limited market liquidity, typically you will not be able to sell a low priced security immediately back to the dealer at the same price it sold the stock to you. In some cases, the stock may fall quickly in value. Investing in foreign markets may entail greater risks than those normally associated with domestic markets, such as political, currency, economic and market risks. You should carefully consider whether trading in low priced and international securities is suitable for you in light of your circumstances and financial resources. Past performance is no guarantee of future returns. Sprott Global, entities that it controls, family, friends, employees, associates, and others may hold positions in the securities it recommends to clients, and may sell the same at any time.