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Private Placements 101

Stockhouse Editorial
0 Comments| November 28, 2018

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Click to enlargeOver the past couple of years, Stockhouse investors have seen a new feature (and investment opportunity) on our site: the Stockhouse DealRoom. This is our way of making private placements both more visible and more accessible to our investor audience.

Dozens of publicly listed (and private) companies have raised $10’s of millions on DealRoom financings: the private placements by which small-cap corporations raise most of their capital. Why should investors even care about these “deals”?

  1. Bargain opportunities
  2. Ease of building larger positions
  3. Flexibility

Buy low; sell high. That’s how investors make money. One reason why sophisticated investors often participate in private placements is the chance to buy lower. Participants in private placements can “get in” cheaper in potentially two different ways.

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First, these financial offerings must be planned in advance. At the time the financing is announced, the unit cost (share price) of the placement can often be slightly or even substantially lower than the prevailing share price in the open market.

Secondly, most financings offer some sort of gratuity/inducement to encourage investor participation. Typically, this comes in the form of “warrants”. A warrant is similar to an option. It allows the warrant-holder to acquire an additional common share at a specified price, and for a specified term.

Just like with options, if the company raising capital appreciates in the market, this allows the warrant-holder to profit. In the case of warrants, it allows the holder to acquire additional shares at prices that are sometimes far below the prevailing share price. But this also equates to greater flexibility.

Investors are not compelled to exercise their warrants. If the company raising capital does not perform as well as expected following the financing, investors can simply allow those warrants to expire – and look for better opportunities elsewhere.

For higher net-worth investors, private placements are an ideal way to build larger positions versus acquiring shares on the open market. Most investors will be able to buy as large a position as they want – all at the specified offering price.

How to participate?

Simply, there are two avenues that allow investors to participate in private placements:

  1. Being an “accredited investor”
  2. Exemptions to being accredited

To be “accredited” as an investor requires meeting specific financial and regulatory requirements. These rules are somewhat complex, so rather than spelling out these regulations here, we’ll point investors to where to go to get the rules:

National Instrument 45-106 – Prospectus Exemption ("NI 45-106")

If investors have difficulty in navigating this process or understanding any of the requirements, speak to your financial advisor. Alternately, contact the company that is conducting the offering. Their Investor Relations department will be happy to help potential participants.

Alternately, in certain situations investors will qualify for one or more of the exemptions to being accredited. Here the rules are simpler. The Ontario Securities Commission (OSC) has created the following exemptions. A July 2017 article provides this information:

In recent years, the OSC introduced four new prospectus exemptions in Ontario (the “New Exemptions”) aimed at facilitating greater access to capital for small to medium sized businesses:

  1. existing security holder exemption, introduced on February 11, 2015;
  2. family, friends and business associates exemption, introduced on May 5, 2015;
  3. offering memorandum exemption, introduced on January 13, 2016; and
  4. crowdfunding exemption, introduced on January 25, 2016.

The Report indicates that the New Exemptions have gained traction among 25% of all Canadian issuers, with 400 such issuers making use of the New Exemptions in 2016, raising $133 million in aggregate.

[Note: each Canadian province has its own rules on these exemptions. Canadian investors should access the exemptions from the provincial Securities Commission applicable to them. Similarly, for U.S. investors, you must determine the specific rules for your jurisdiction of residence.]

Whether a particular exemption is applicable is a question that can only be answered through a discussion with the issuer, i.e. the company raising capital. Once an investor is accredited, this will allow participation in future private placements, without the need for undergoing the qualifying procedure again. However, exemptions to accreditation must be obtained on a financing-by-financing basis – due to the unique criteria involved.

This is a general outline of how to participate in a private placement, whether on the Stockhouse DealRoom, or elsewhere. Investors looking for a more detailed look at this topic can reference a U.S. article that discusses the pro’s and con’s.

While the context for that article is U.S. markets and securities regulations, the arguments made apply similarly on both sides of the border. We’ll mention the two principal “con’s”, to provide balance to the article:

  • higher risk
  • (potential) illiquidity

Additional risk comes in two forms. As generally junior companies, these investments will tend to be more speculative. In the case of placements from private companies, there is often not the same degree of corporate transparency for investors.

If investing in a private company, it can be sometimes difficult for investors to exit such positions – unless/until that company obtains a public listing and becomes accessible for the general trading of shares. Even with public companies, depending on sentiment and share structure, particular public companies can also be relatively “illiquid” at times.

Risk/reward: it’s the inherent proposition of investing. Generally, obtaining greater upside on the reward also implies taking on a higher level of risk. Investors choosing to participate in private placements my offset such risk by rebalancing their other holdings into safer/more stable investments.

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[courtesy of Alpha Stock Images - https://alphastockimages.com/]

For investors who are interested into looking further into this process – and the opportunities – here is a list of financings that are currently open on the DealRoom.

Wahupta Ventures Inc. (private, Forum) – cannabis company


Bougainville Ventures Inc. (CSE: BOG, Forum) – cannabis company


Teal Valley Health Inc. (private, Forum) – cannabis company


Nordic Gold Corp. (TSX: V.NOR, OTCQB: FIEIF, Forum) – gold mining company


American Manganese Inc. (TSX: V.AMY, OTCQB: AMYZF, Forum) – battery metals tech company


LYF Food Technologies Inc. (private, Forum) – cannabis company


FTI Foodtech International Inc. (TSX: V.FTI, Forum) – technology company


FULL DISCLOSURE: Wahupta Ventures Inc., Bougainville Ventures Inc., Teal Valley Health Inc., Nordic Gold Corp., American Manganese Inc., LYF Food Technologies Inc., FTI Foodtech International Inc. are all paid clients of Stockhouse Publishing.


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