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Understanding investing: private placement vs. retail benefits

Brieanna McCutcheon , The Market Herald Canada
0 Comments| 13 days ago

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Joining The Market Herald Canada today is none other than Howard Katz, managing director of Research Capital Corp. to talk to us about company raises versus open market stock purchases.

And hold on to your seats because Howard is here for a multi-part series on investing.

TMH: What are some key points investors should look for when researching a deal? I know there’s probably a lot, but if you could maybe simplify that for video purposes.

Katz: Sure. So today we’re blessed with a lot of public information is out there. So, what I recommend investors do is go to the public disclosure of a company. And usually, they have a few good sites, starting with the company’s own website. So, I would encourage people to go to the website and look at a few areas within the website.

So, for example, look at management and understand whether they have a track record of success or not, or whether they’ve talked about some past successes.

I would also look at the company’s corporate slide deck. From there, you can probably get a very good understanding of the nature of the company’s business plans, how they’ve potentially executed against their stated goals and what some of their aspirations are going forward. So, I would say that looking at the public slide deck is also an excellent place to start.

There’s also on the regulatory side, there’s a website in Canada called SEDAR that is a repository of all the Canadian public content filings that are available with respect to any specific issuer, and I think that’s also an excellent place to go for historical financial statements and any other material public filings.

And then finally, what I would just say is, that there are a lot of excellent apps out there that enable you to analyze a company’s trading performance and such. So, I would also recommend that companies or rather investors looking to analyze companies use some of these apps that are publicly available, to just try to understand the nature of the stock performance in the past. So those are a couple of public areas that I would recommend that investors start as part of their due diligence.

TMH: Can you explain to investors the value proposition of investing in a company versus buying retail stocks in the exchange?

Katz: Sure. So, if you’ve done your homework and you’re comfortable with this company and you’ve had a discussion, perhaps, with your investment advisor to make sure that this type of investment suits your overall investment portfolio. And now, now becomes a decision as to how to acquire shares of this company. And I would say, broadly speaking, there are two different ways that you can acquire shares. The most popular method, and widely known the method is, is buying shares on a recognized exchange. So, whether that be the Toronto Stock Exchange or the CSE or the NEO, for example, being some popular Canadian stock exchanges.

Then you can then have a brokerage account and acquire shares from another investor on the stock exchange. What happens there is that you are depositing money in your brokerage account and then the money exchanges between you and another investor.

The other method to acquire shares is to buy into what we call a deal or a new issue. And that entails a company publicly offering stock to investors. Now what happens there is that the company sells stock to investors and an investor can usually, with the help of an investment advisor, but not always, invest in a public company.

And what happens there is that instead of the money going to another investor, what happens is that the money goes directly to the company and is in the company’s treasury. What that means ultimately is that if the company has raised enough money, then now they have additional capital to pursue their business plan.

So that’s an important distinction between buying money shares in the open market versus buying company shares from a company. Now I should also add, there’s also an increased dilution that in other words, the share count has gone up pursuant to this offering. So, assuming that the company can build value in excess of the dilution, that should mean that the company should, hopefully everything else remain constant, the value of the company should increase, thereby increasing the value of the shares of the company. Doesn’t always work that way, but that’s the theory.

TMH: Can you explain the difference between a prospectus offering versus private placement versus a life exemption offering for investors?

Katz: So historically, a private placement has been one of the most popular ways for a company to access capital from the public markets. And essentially it is a form of offering whereby the company issues new shares to investors. The target audience of a private placement has been historically institutions and high net-worth investors. And really, that enabled the company to issue shares and obtain capital on a relatively efficient basis.

But there were a couple of caveats. One is that the shares that were issued were subject to a four-month statutory hold. In other words, investors obtaining those shares would be restricted to a four-month hold period. So we couldn’t trade the shares for four months. And then secondly, the audience was significantly narrower than say an offering that’s done by a prospectus, which could be open to anyone. But a private place will only be open to what we call accredited investors. Accredited investors are subject to either an asset test, they have a certain amount of assets, or they have a certain amount of annual income that distinguishes them as an accredited investor.

So there’s been a new development in the last year called a life offering, which really combines the elements of a private placement and a prospectus offering. And so, what I mean by that is that a company can choose to use a life offering and has pretty much the same standards and documentation on its end to prepare a life offering.

Instead of it being limited to accredited investors, it’s open to basically all investor types. Furthermore, the shares that are issued pursuant to a life offering are freely tradable at the closing of the offering. So there’s no hold, there’s no statutory hold period associated with those offerings.

So it’s quite an attractive offering and the paperwork associated with it is considerably less than say a traditional private placement. I would say though that the annual limits of a life offering exemption are limited to 5 million annually, or 10 percent of the company’s market cap.

So it is in relatively short supply as opposed to say a private placement in terms of total dollar offerings available, but it is a very powerful tool, one that we’ve seen that has been very popular with both issuers and investors.

TMH: I know you’ve already given us a lot of information, but do you have any more additional tips for investors when it comes to raising considerations before we let you go?

Katz: At a high level, I think I touched on this a little bit before, it’s always interesting to analyze the share trading activity of a company to understand where you are entering in, at what price point you’re entering a potential offering, vis a vis its historical trading activity.

So, it’s always good to sort of analyze the trading activity within the last couple of weeks or months. And then I would also add that it’s important to look at the deal structure of the issue that’s being offered. So oftentimes deals offer incentives for investors to participate in the offerings and these are sometimes called unit offerings where the offering comprises both a share and either a fractional or entire warrants as an inducement.

And warrants are interesting financial instruments. They basically behave as a type of stock option where holders of warrants have the right but not the obligation to exercise in exchange for an additional share. So, if all things go well, it can provide additional leverage on the upside if a stock performs well after the offering.

So, it is an important inducement. There’s, probably a larger discussion out of some future time about the nature of warrants, but they are a financial incentive and they’ve become an important one in the public markets for companies obtaining capital.

The material provided in this article is for information only and should not be treated as investment advice. For full disclaimer information, please click here.

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