Private Placements in Silver Companies
Silver Stock Report
by Jason Hommel, Nov 19, 2003
A company will raise money by issuing shares, in what is called a "private placement" (PP). If you read the news reports, you see that they typically involve "units" that consist of a share and a warrant, or half warrant. A warrant is like a call option, which gives the holder the right, but not the obligation, to buy a share of stock at a set price until a certain date. The warrants are what really attract the big investment money to participate in the private placement.
People who participate in PPs are typically wealthy investors who can buy up to $10,0000 to $50,000 minimum worth of stock at one time. The company does not have time to do PPs with hundreds of people who can only invest $1000 or less. A PP requires a contract, perhaps some negotiations, and numerous phone calls to work out the details, questions and concerns of the wealthy investor.
The price of the PP is usually lower than the share price. By law, it can be no lower than 80% of the share price the previous day, at the time the private placement (PP) is announced. (So a rapidly upwardly moving share price can either scare away a potential large investor, or make them even more eager to participate!) But by the time the PP closes, perhaps a month later, the share price may be significantly higher, and this creates a very great opportunity for those who participate in the PPs, especially in a bull market in silver stocks.
The price is usually less to compensate the larger investor for the lack of liquidity. PPs are also risky for the large investor, because a large investor usually cannot sell a large portion of stock at once without damaging the share price, and hurting their own position. They may not be able to sell until the company has profits, which may be years down the road. To protect existing shareholders from a large investor dumping the stock, there is a hold time where the shares acquired cannot be sold for 4 months or even up to a year for warrants. And that creates even less liquidity for the large investor.
The biggest concern is the lack of liquidity. You cannot sell right away as you normally would if you bought stock on the open market. There is no time for second thoughts, or jumping out if the bullion price drops. You have to know what you are doing, that's why they call these investors "sophisticated". I believe the liquidity concern can be properly compensated if you understand the long term structural situation of the silver market, and can afford to wait it out however long it takes, and are prepared to sustain further market manipulation by the short sellers.
The liquidity concern can also be addressed if you hold a significant portion of your portfolio in the most liquid form of all, real physical silver. I recommend putting 20% to 30% into physical silver bullion for the increased liquidity. Nothing is more liquid than physical metal.
Cash may not be liquid as you might think, since its value may drop significantly at any time (perhaps tomorrow) in a major currency crisis, and who would want it? Bank accounts or savings accounts denominated in dollars may not be liquid if there are bank failures or a banking crisis, or restrictions on cash withdrawls or transfers. These days, I'm most nervous about holding cash. I'm a bit nervous about the lack of liquidity of a private placement, and the least nervous about the spread that exists when buying and selling physical silver.
Big investors and small investors have similar concerns: each wants to buy and sell with the smallest commission. A smaller investor might complain about a large commission of 3-10% when buying a stock. A larger investor may pay reduced or no commissions, but may have to bid a stock up 15-30% just to buy in on the open market.
There is also an interesting relationship between the larger and smaller investor, though they may not realize it. Each tends to find comfort in the participation of the other. When many smaller investors buy, it encourages larger investors, and when larger investors buy, it encourages many smaller investors.
There is also an interesting relationship between existing shareholders and new shareholders who participate in the PPs. The existing shareholders typically do not want dilution, but they also need the money that the PP brings in to help the company develop further along.
A junior exploration company typically requires private placement money to survive. If PP money dries up, administrative expenses have to be cut back and exploration halted. Companies may require continual PP money to remain viable as an ongoing concern. The constant issuing of new shares can create enormous dilution that can literally drive a share price into the ground -- and I've seen that happen with numerous companies. If there has been such excessive dilution in the past and if the share price is really low, it can also create tremendous opportunity as the a bull market in metals returns, and if the company holds valuable mining properties.
I believe there is already a shift developing in the attitude that silver companies are taking towards doing PPs. In the bear market, companies were getting desperate for PP money. Now, companies are more cautious. Many want to wait for significantly higher share prices before they do a PP. Or they are doing small PP's on purpose. Another shift is in the pricing. As stated previously, pricing on the date of the announcement may be no lower than 80% of the share price the previous day. But there is no rule saying the price must be low. In a bull market where the prices of silver stocks may rise 10-100% in a single day when new buying hits, it may well be prudent to price a PP at or above the current share price. After all, if a big investor was desperate to buy on the open market, they may well push the price up well above the current share price.
We are actually entering the time when money is literally being thrown at silver companies, and they have to refuse it, because PPs are limited in size! Therefore, the price of PPs in silver companies must go up, as that is the natural law of supply and demand. There is great demand for silver stocks, and little supply.
A curious rule about private placements is that a company cannot advertise them or engage in any "general solicitation". (Yet money is being thrown at them anyway!) They can announce them, but not advertise. A private placement is supposed to be private. After an announcement, it may be too late to get in, as an investor may be expected to have a pre-existing relationship with the company.
So, how do people find out about the private placement opportunities in the first place? Usually by word of mouth, or by contacting the company directly.
I know a lot about silver companies these days. I know, because I've called many silver companies in preparing my free weekly silver stock report. I have spoken with the directors and CEO's on numerous occasions.
Silver stocks are hot right now, and so the private placements, when announced, can be filled in as little as two days. So it's important to know about them before they are announced, and to already be on a list of accredited and interested silver investors, or to already be a shareholder.
Do you ever wonder about who those people are who participate in private placements? Do you qualify and not know it? More and more people will qualify as hyperinflation hits, and if the qualifying numbers ($200,000 annual income or $1,000,000 net worth) are not increased to compensate. I suspect that with rapidly rising silver stock prices, many people have just moved up to being an "accredited" or "sophisticated" investor, and not yet even know they were one! If this describes you, it may well be the best time to join the club, get your feet wet, and join in the big leagues by participating in a private placement!
Here is a list (from a private placement contract of a company in the US) of the people who qualify to buy a stock offering in a private placement: (Note numbers 1 and 2, which I think is the most common case):
1. A director or executive of the company.
2. A natural person with an individual net worth, or joint net worth with spouse at the time of investment in excess of $1,000,000. As used in this subparagraph, "net worth" means total tangible assets as currently valued less total liabilities.
3. A natural person (i) who has had an individual income in excess of $200,000 in each of 2001 and 2002 or a joint income with spouse in excess of $300,000 in those two years and (ii) who reasonably expects to reach the same income level in 2003.
4. A corporation, tax-exempt organization (under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended), Massachusetts or similar business trust, or partnership (i) not formed for the specific pursuant of acquiring the Shares and (ii) having total assets in excess of $5,000,000.
5. A trust (i) not formed for the specific purpose of acquiring the Shares, (ii) having total assets in excess of $5,000,000, and (iii) whose purchase of the Shares in directed by a sophisticated person (as described in Rule 506(b)(2)(ii) under the Act).
6. An entity in which all of the equity owners are accredited investors.
7. A bank, savings and loan association or other institution as defined in Section 3(a)(5)(A) of the 1933 Act, whether acting in its individual as a fiduciary.
8. A broker or dealer registered pursuant to the Securities Exchange Act of 1934, as amended.
9. An insurance company, as defined in the 1933 Act.
10. An investment company, registered under the Investment Company Act of 1940, as amended.
11. A business development company, as defined in the Investment Company Act of 1940, as amended.
12. A small Business Investment Company licensed by the United States Small Business Administration.
13. A plan established and maintained by a state, its political subdivisions, or an agency or instrumentality of a state or its political subdivisions for the benefit of its employees, which has total assets in excess of $5 million.
14. An employee benefit plan within the meaning of Title 1 of the Employee Retirement Income Security Act of 1974, as amended ("ERSISA"), if the investment decision is to be made by a plan fiduciary, as defined in Section 3(21) of ERISA, which is either a bank, an insurance company, or a registered investment advisor, or if the employee benefit plan has total assets in excess of $5 million.
15. A self directed employee benefit plan with (i) a net worth in excess of $5 million of (ii) whose investment decisions are made by , and solely for the benefit of, a natural person (a) whose net worth, or joint net worth with spouse, at the time of purchase exceeds $1 million of (b) who had income of $200,000 (of $300,000 with spouse) in each of the two most recent years and who reasonably expect an income in excess of $200,000 of ($300,000 with spouse) in the current year.
16. Other type of accredited investor (provide reference to appropriate subparagraph of Rule 501(a):___________).
This is not a recommendation to participate in private placements instead of buying stock on the open market. Opportunities can be lost by not investing in a silver stock on the open market and hoping instead to get in on a private placement opportunity that may not materialize, or be oversubscribed, or not go out until a much higher share price is reached. Each way of investing (open market vs. private placements) has it's own risks and rewards.
If you qualify to participate in a PP as a "sophisticated" or "accredited" investor, and if you would like to be notified about private placement opportunities in silver stocks as I may become aware of them, then email me and make mention of "PP," and let me know if you qualify at email@example.com
I'm not selling any securities, and I'm not a licensed securities broker, nor am I advertising for any particular company. This is not a general solicitation to general investors. The opportunities I may have knowledge of, are only suitable for investors who, like myself, strongly believe the silver bullion market will move up substantially. Potential investors are also expected to have a specialized knowledge of the silver stock market and silver bullion market.
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