Private Placements in Silver Companies
Jason Hommel
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 jasonhommel@yahoo.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.
To receive my free weekly silver stock report, please sign up at www.goldismoney.com
November 19, 2003
Other essays by Jason Hommel:
25 Reasons To Support The Sound Money Bill - 08 July 2004
I'm Insanely Bullish On Silver - 19 June 2004
Silver Stock Evaluations - 22 May 2004
The Silver Bull Is Back - 04 May 2004
Late April Silver Update - 22 April 2004
Silver Juniors With Cash Flow - 04 March 2004
Major Frauds of the U.S. Monetary System - 26 February 2004
Market Perspective & Cabo Mining - 12 February 2004
Usury Enslaves - 19 January 2004
Sterling Mining - 29 December 2003
The U.S. Trade Advantage With China - 17 December 2003
Rising Gold Prices Will Help The Economy - 02 December 2003
Miners to Use Silver as Cash - 27 November 2003
Private Placements in Silver Companies - 20 November 2003
Is the Silver Market Too Small to Buy? - 13 November 2003
Inflation & Deflation During Hyperinflation - 06 November 2003
Silver Price Expectations of Silver Stock Investors - 30 October 2003
Buying & Tracking Canadian Silver Stocks - 29 October 2003
Canadian Zinc--Silver Potential - 23 October 2003
Silver Stocks--Comparative Valuations - 4 - 13 October 2003
Silver Stocks--Comparative Valuations - 3 - 06 October 2003
Silver Stocks--Comparative Valuations - 2 - 29 September 2003
Silver Stocks--Comparative Valuations - 1 - 22 September 2003
Silver and Cardero Resource - 08 February 2003
The Moral Failures of the Paper Longs - 22 January 2003
CFTC Response to Silver Problem - 14 January 2003
People Talking About $32,567/oz - 10 January 2003
Letter To Authorities of Silver Markets - 06 January 2003
Why no talk of $32,567/oz ? - 02 January 2003
Refuting Myths about Gold - 28 October 2002
Controlling Gold with Paper - 10 June 2002
Impending Gold Futures Default - 29 May 2002
Certain gold stocks are still cheap - 07 May 2002
A Few Supply and Demand Fundamentals of the Dollar and Gold - 06 May 2002
New DROOY Institutional Holdings - 21 February 2002
Hommels View of Gold - 23 March 2001
Gold Price Under Differing Scenarios - 24 June 2000
Goldismoney.com
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