I am arrogant enough—or foolish enough—to think that I can pick winning stocks on the open market. Well, I do have 14 years of experience delivering extraordinary gains more often than not…
But the greatest resource speculators I know—people like Doug Casey and Rick Rule—do not make most of their money this way.
Their main form of speculation is in private placements.
Despite the name, a private placement is a public offering of new shares a company makes to raise money. It’s like an initial public offering (IPO), except that it’s not “initial.” It’s not linked to a company starting to trade on a stock market.
If you’ve never heard of this, it’s probably because few mainstream companies ever do private placements. Once they’re up and running, they’re expected to be profitable and to be able to fund growth out of cash flow or via conventional debt. If General Motors were to offer a private placement, it would likely mean there was something very wrong with the company.
Why Would a Company Do This?
Consider a mineral exploration company or a tech startup that doesn’t have a product yet. Such companies need more cash from time to time to keep exploring or developing their projects, but they have no revenue. With no revenue—for who knows how many years—there is no way a bank will lend such a company a penny, let alone the millions it needs. So management offers to print new shares and sell them to the public.
Then why is it called a “private” placement? Because the offer isn’t made on the stock exchange, but directly to private individuals and institutions. Sometimes a brokerage says it will broker the deal: selling the offer to its clients exclusively and saving the company the trouble of looking for investors. When this happens, it’s called a brokered private placement, or a “bought deal.” Offers open to individuals are called non-brokered private placements.
Why Would an Investor Buy?
If the new shares were simply offered at current market prices, there wouldn’t be much reason for investors to buy them. So companies add extra incentives. A common one is to price the shares significantly below market. Another is to “units” that include a share and a warrant. Warrants are like options to purchase shares at a set price (strike price) for a set period of time.
It’s that second incentive that’s key here.
If I can buy into a private placement with a full warrant that’s good for a couple years—or more—it gives me time to see if the company delivers.
I can exercise the warrant any time I want to, or not, until it expires. If share prices rise well above the warrant’s strike price, I can exercise my warrants and sell the new shares at a guaranteed profit. And if not, I pay nothing more, and lose nothing but an opportunity.
Meanwhile, I still have the shares that I got with the warrants in the first place. Those are usually subject to a 4-month hold in Canada, or a 12-month hold in the US. Once they are free-trading, I can hold them or sell them—or buy more, as I see fit. If the stock does well, great; the warrants may add to my profit on the shares. If it doesn’t, I can sell my shares and recover some of my investment, and still hold on to the warrants in case the company does deliver before they expire.
How To Get a Seat at the Table
There’s a sense among investors that you have to be some sort of Wall Street or Bay Street fat cat in order to get a seat at the private placement table. This is not so.
It is true, however, that you need to be an accredited investor. There are different levels of accreditation, needed for participation in different sorts of deals. The basic thresholds aren’t too high for most investors. In the US, you must have a net worth of at least $1 million (excluding the value of your primary residence), or have income at least $200,000 for the last two years. If you’re not there yet, I hope the Independent Speculator will help you get there soon.
As for finding opportunities, the easiest place to start is with the companies you already like. If you speculate on a startup or an exploration company (which is a kind of startup, if you think about it), you should hear about it when the company needs more money and offers a private placement. If the terms are good, call or email the company and ask to participate. They’ll send you the forms. You can also monitor the press releases of other companies you’re interested in and do the same thing.
Of course, a full-service broker can and should be able to get qualified investors into excellent private placement opportunities. (Here’s my list of recommended brokers.)
Personally, I often find the best opportunities while on my due-diligence trips.
I’ll be kicking rocks on a mineral exploration project, for example, and I’ll see that it’s got great potential to deliver a home run. But I also see that it’s obviously going to cost more money to get there than the company has in the bank. That’s not inside information. That’s me using my experience and judgment to see a private-placement opportunity before it happens.
This is how I can ask for a seat at the table before it’s even set—and alert my readers to opportunities ahead.
Note that because such opportunities usually require quick action, I’m generally going to cover them in my In The Deal service. But for opportunities that are still open when the monthly Independent Speculator is published or are offered by companies in the Independent Speculator portfolio, there will be coverage there as well.
You can do this on your own.
Or you can ask your broker to help you.
Or you can follow my lead on the deals I put my own money into.
The point to remember is that private placements with great warrants attached are the best way to add to the upside in your speculations while minimizing risk.
This is how my mentors made their fortunes.
