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The Ins and Outs of Making a Private Placement
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Maurice Jackson In part two of his series, 'All About Private Placements,' Maurice Jackson of Proven and Probable solicits details on how to find private placements, and then how to process forms for those placements, from Tekoa Da Silva, a financial advisor with Sprott USA.

Maurice Jackson: Thank you for joining us for a special four-part series entitled, 'All About Private Placements, Part 2.' Joining us for conversation is Tekoa Da Silva; he is an accomplished licensed financial advisor for Sprott USA, the preeminent name in the natural resource space. Full disclosure, the following is not a Sprott USA endorsed product and it is for educational purposes only.

Tekoa, can I find a private placement on my own or do I have to use a broker?

Tekoa Da Silva: For the reader, you can find a private placement on your own. I think it's probably good if a person wants to do that. They could try it out for a bit to see if it fits. And the best way to start that process is to visit a couple of news websites that [have] published press releases and other information on junior mining companies. Those websites will routinely republish the press releases announcing private placement by companies in the space. And the way to dip your toes in is to call and e-mail the contact information at the bottom of some of those press releases—the investor relations contact—and just start talking to them. If you like the way that a certain private placement looks, you can request the paperwork; you can participate in it if you like. That could be a way to sort of dip your toes in and see if you like that process, if you want to do it.

If you want to create for yourself a pipeline of incoming deals—I would say that process probably takes a couple of years—a great way to build that for yourself, is to do what I just mentioned. . .put together a list of websites that publish those things. One that comes to mind is, of course, Proven and Probable, your website, Maurice, which is fantastic. And then 321 gold, Bob Moriarty's site, is wonderful for that too, as well as and many other sites. Speculators can start to bookmark those first.

But building out the infrastructure, I think, also includes two very good sources of information. And the first one is brokerage houses. A person can open two to three brokerage accounts with natural resource specialist firms where they indicate that they have an ongoing stream of private placement opportunities available to them.

Just get the account open, see if you can open it with maybe a zero deposit or something like that so you can get to know them. And then talk to a couple of different brokers there and see if there's someone that you seem to get along with. And then give them 6 months or 12 months of getting to know each other and see what they present to you.

During poor market conditions you will always be fed a stream of probably suspect private placement deals, where the cost of capital is really low for the issuer and high for you, the investor. And in many of those cases it will be a capital markets or a capital raising group who's earning a commission selling the deal. They're not buying it themselves in many cases, they're just making a fee selling it. You want to keep that in mind as you consider deals from those sources, one at a time. So that's the second source.

The third source I think is wonderful is a growing source, and that is newsletters that focus on natural resource mining or junior mining shares that are building out a private placement information delivery part of their service. There are a couple that come to mind, but the best way to do it is to e-mail the dozen or so junior mining resource newsletters out there and ask the editor of every single one of them, do you cover private placements? Can you put me on your VIP list? And I know they'll tell you, as opposed to me recommending, which may or may not be good for any one person.

So once again, junior mining websites, two or three brokerage accounts with specialists, natural resource firms. I'm just thinking North America because that's where I have more experience dealing. Three firms that a person could look at are Sprott Global Resource Investments, the office in Carlsbad, California. They could also look up Haywood Securities. I believe they have an office in Vancouver, as well as Canaccord Genuity; I think they have an office in Vancouver too. Talk to all three of them and then, once again, look up a dozen junior mining newsletters and talk to the editors and see what they could provide.

Maurice Jackson: What type of people and resources do I need to participate in a private placement?

Tekoa Da Silva: Assuming that you've got your deal flow structure built, using those junior mining websites, using your broker contacts and using your newsletters, what else do you need? If you're going to be doing junior mining private placements, it's again, exploration and development-stage companies that most often raise money by private placement. It is an extremely high-risk business. . .To do intelligent speculation or investing, I think it's really important to have geological input—having skilled experienced geologists; geological input from some source, hopefully multiple sources—so you can compare them against each other, so that you're not just relying on the information that a management team may be giving you, the same management team that's asking you for your money by private placement. You really need someone to help you vet the deals, the quality of the deals.

Now, where can you get geological information and input? Boy, a person could do some scuttlebutt, they can go to some junior mining resource conferences and meet geologists on their own and pick up business cards. And meet a number of them, talk to them over time, develop friendships and see who has a more experienced and a skeptical eye in looking for good investments. They can talk to the brokerage houses and say, "Who do you have on staff? What is their experience? How many people do you have on staff with geological expertise?" And then they could also ask the same thing to the newsletter writers that they may deal with. "Hey, do you have a background in geology?" There's one newsletter that I'm thinking of that has a couple of guys that have spectacular background in geology. . .

Maurice Jackson: Are you referring to Brent Cook?

Tekoa Da Silva: Yeah, darn right. Yes, Brent Cook and his partner Joe Mazumdar of Exploration Insights. These guys are brilliant. And my belief is that they have skepticism and experience, [which] I think is really needed.

What people resources do you need? Assuming that you've got your pipeline for deal flow in place, that's [a] check. Assuming you've got your deal quality filter in process, in place in terms of geological input from those places that I just mentioned: Check. Lastly, you need administrative people in place to be able to help you deposit your securities and then strip off any restrictive treatment that may be in place that would preclude you from being able to resell your stock in the open market. So where do you get that administrative staff? That goes back to our group of broker-dealer houses, where in addition to a broker-dealer that has expertise in private placements and geological expertise, you want to talk about their depositing capabilities.

Are you able to deposit physical shares or physical securities for companies? What are the costs? What are the timeframe for doing so? What is the paperwork assembly procedure? Because these days, the cost of doing that for North American companies—certainly for American broker-dealer houses in my view—[the cost of offering that service] continues to go up. And it really is just as much legal as it is financial. So you really want to have that part mapped out before you even buy a private placement. You want to find out about the administrative route to get out of the speculation and out of the investment when you're ready.

So, people and resources, again: your infrastructure to find the deals, your people infrastructure to vet the deals and get secondary and tertiary opinions on the quality and the terms. Thirdly, your administrative staff in place who can process it, clean it, clear the restrictive ledges, and then help you sell the stock at some point in the future.

Maurice Jackson: We've covered the administrative costs. Let's talk about the cost to participate in a private placement. What are those costs usually?

Tekoa Da Silva: Well, I would say you've got participation minimums with an issuer. I think it's usually about CA$10,000.

Maurice Jackson: That's what I've encountered myself, yes.

Tekoa Da Silva: The issuer can always confirm that. So that's about US$7,500. And then [usually] about $300 to $600 in administrative fees. Your broker-dealer can confirm that cost for you. And then I would also say to budget a 1–2%, maybe 2.5%, sales commission costs on your way out. When you sell the security, just write that into your budget and then your broker can confirm the exact cost for that size commission.

Maurice Jackson: Let's talk about third party fees when participating in a private placement. What can you share with us?

Tekoa Da Silva: For third party fees, I would make it a part of that $300 to $600 budget that I mentioned. First off, every brokerage firm has to have something called a clearing firm, a clearing bank. That's where they deposit all the customers' cash and securities. If you want to deposit a private placement-obtained security, they call that a physical security because when they do a private placement. They actually print security certificates that they have to physically send somewhere. And when those folks get it, they need to deposit it. They usually deposit it into their vault system until they get ready to physically process it and send it out somewhere else. Just to take it in, to touch it and then deposit it.

They have a certain legal process in place that touches people's properties. So just to deposit it, you have to expect probably about a $100 deposit fee, but that depends on the clearing firm that person uses. The broker-dealer will be able to confirm the deposit fee. Once you've done that, you get ready to remove restricted legends that may be on the back of a security. A legend is simply a paragraph of text, and a restrictive legend means a restricted paragraph of text that is printed on the back of a security that says you can't sell this security until this such and such date, or until such and such conditions have been satisfied. In my experience, in dealing with U.S. markets, it has to do with satisfying legal circumstances regarding where you are allowed to sell securities and where you are not allowed to sell securities.

You want to talk to your broker about that because they can give you really specific advice about a specific security issued, as well as the issuer—the company that gave you the private placement—to confirm that language on the restrictive legend text that's on the back of the certificate.

So, how do you remove those? Well, it's your clearing firm bank working with a partner called a transfer agent, and a transfer agent is a bookkeeping firm that is an intermediary between the clearing firm and the issuer in helping to just handle stock certificates and keeping records of who owns what dividend and payments. They give you all that bookkeeping stuff with regards to securities. The clearing firm is going to set up the fiscal securities to the transfer agent; the transfer agent [gets] it and they're going to assist with removing those restrictive legends and printing new certificates, and then they're going to charge that fee.

So, [we are] at $300 to $600 budget for third-party fees. I would say put a $100 aside for the deposit fee. And then I would expect between $100–200 in legend removal fees to come from the transfer agent. Computershare is a very large transfer agent company, so they're usually part of the process.

And then I would even make an extra little budget for, let's say, $50 to $75 for an additional transfer agent fee of some kind that they might put back on before they send it back to the clearing firm. So, for third-party fees, that's what I would say. But that only covers about $300 to $400, just those two things.

Then I would say make an extra $200 budget for when things go wrong, because sometimes things go wrong. Some forms sometimes can be misplaced; truly that's what happens and it can happen anywhere. Be prepared, you may have to resubmit things, and then sometimes you may get double-charged for something and it will take you forever to fix the double charge. Just all these little tiny things that come up. That's why you just want to make it a little extra in your budget, so there's no surprises. I would say that pretty much covers the third party fees.

My experience has been that when an issuer issues the securities that were purchased during their private placement, they could be. . .issued through two different avenues. One, the transfer agent may immediately print and send out the securities to the subscribers, and the subscriber just means the person who participated in the private placement. They could immediately send out those securities to the person in the mail. So you open up a package and you've got physical stock or debenture warrants or certificates right there. That's the first avenue.

The second avenue is [where] they'll be creative at the transfer agent—let's assume Computershare or something. And then what will happen is, they'll be kept at Computershare or at the transfer agent in an account there. The term 'DRS' is often used, which is 'Direct Registration System.' I've seen people often are issued a statement, and it says DRS advice statement, which is similar to a statement that [you] may get from the savings bank, which shows the property that you have inside the account at that organization.

So the security can be issued in two different ways: One, immediately putting a paper form and sent to you in the mail; or two, kept in the DRS advice at the transfer agent. Now, how do you get it to the broker? If you get the physical security to your mail, you can immediately send them to the broker and then they'll re-route it to their clearing firm and then to the transfer agent to initiate that process of legend removal.

Or, you get the securities issued to you on your behalf. But inside the DRS advice or DRS account with the transfer agent, you'll want to double check with your broker to say, 'OK, I've got this security issued to me, but it's in the account, the DRS account off the transfer agent. Can you please advise? Can it be digitally transferred to your clearing firm or does it have to be produced into paper? Does the paper have to sent in, to go through a formal legal review process, before it would be allowed to be deposited into the account?'

Either way, somewhere in that process, the broker that you deal with will likely ask for what are called legend removal forms, which are just extra forms that you sign by the end. You are usually sending the original, wet signature documents by postal mail to the broker-dealer. And then they'll supply them to their clearing firm to aid with the process. Does that answer the question?

Maurice Jackson: It certainly does and I hope it answers anyone's question who has some ambiguity regarding this, because it can really be a challenge and frustrating not knowing what to do once you receive your certificate.

Ladies and gentlemen, this concludes part two of "All About Private Placements." If you wish to have a conversation with Mr. Da Silva, e-mail [email protected]. If you want to find out which private placements have our attention at Proven and Probable, simply visit, place your correspondence in the subscribe box, and let us know that you are accredited. Subscription is free and we do not share your correspondence with third parties.

Maurice Jackson is the founder of Proven and Probable, a site that aims to enrich its subscribers through education in precious metals and junior mining companies that will enrich the world.


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