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More Details on Private Placements
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Maurice Jackson In part three of the series, "All About Private Placements," Maurice Jackson of Proven and Probable talks with Tekoa Da Silva, a financial adviser with Sprott USA, about details of private placements, including removing restrictive legends, exercising warrants, timing of private placement tranches, and understanding corporate share structures.

Maurice Jackson: Thank you for joining us for the third part of a special four-part series entitled All About Private Placements. Joining us for conversation is Tekoa Da Silva. He's an accomplished licensed financial adviser for Sprott USA, the premier 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, we concluded the second part of this series with the question regarding legend removals. Now what if I have an online discount broker? Can I go to them and have my legend removed?

Tekoa Da Silva: Looking at it from a North American context, a person may have a brokerage account with Charles Schwab, Fidelity, TD Ameritrade. The best place to get the answer that question is by calling them and asking the adviser that the person works with. And the answer that they get will probably result in you having to speak to three or four people at that firm to get a precise answer and it may be an imprecise answer at that. My impression is that many of the broker dealers, certainly in the U.S., are continuing to cut out the services that they used to offer because they're no longer considered core products and services, and the cost of offering those services is going through the roof in terms of compliance and legal.

So why deal with it? From their standpoint, I think it makes much better sense to just simply let those services and those people go. But a person can always ask and they can always try. My observation and my discussions with a few people that have tried some of those discount online brokerage firms in the past was that it was a real run around, sort of like spending a week at the DMV.

So if someone has some time to kill and they want to pursue that process, by all means. But my advice would be to vet out a couple firms that claim to be specialist, natural resource and private placement capable firms, and test them out and see how they go. But be careful with trying to do private placement activities with discount brokers.

Maurice Jackson: I've gotten the legend removed and I now have the ability to sell my shares, but also the price has increased. Let's use this scenario that we discussed earlier with Novo Resources Corp. (NVO:TSX.V; NSRPF:OTCQX). I bought it at 66 cents. The warrant, I can exercise it for one year at 90 cents, and the stock price is now at $7. How do I exercise this warrant?

Tekoa Da Silva: Exercising a warrant obtained by private placement. So, the broker that you use, who hopefully shows themselves to be very competent and really knows their stuff, will have a specific procedure laid out to you where they can say, "This is the form that you need to fill out." Well, I'll come back to that in just a second, but they'll say, "This is the form that you need to fill out here saying deliver us the funds and here's what our process is going to be once we get those two items from you." And I'll describe my observation of how that process works, but first I'll say if we go back to here's the form that you need to fill out to exercise your warrant, I would say when a person wants to participate in a private placement, they get an agreement called a subscription agreement from the issuer.

It's a 30 or 40 page document. If you look at the end of that document, there's usually a page right in there. It's an appendix page usually and it says exercise warrant or warrant exercise form. They'll include it right in there sometimes and you look at it and you basically write the certificate number of your warrant certificate in there, you sign it and you deliver that with the funds to the issuer. So you can forward the processing fees to the issuer by bank wire and then send them the warrant exercise form. I believe they have any ability to exercise your warrant without them actually having possession of the original warrant certificate because they'll just cancel out the number once they exercise it.

And so that's one way to do it. Another way to do it is if the broker says, "Here's how you exercise it, you can give us these forms. Here's how you give us the cash and then we'll take care of it for you." They would essentially be doing the same thing, using their clearinghouse bank. If their clearinghouse bank has your warrant certificate deposited in a vault, that just means that they'll have somebody go in there and pull out the certificate, put it with some funds and then send it to the issuer that way. And then the issuer, they get started with their legal process working with the transfer agent and having the stock certificate. If you're exercising the warrant to buy common shares, they'll get to work to create the stock certificate at the transfer agent. And then once that stock certificate is produced, you're back at step number one with regard to depositing traditionally or your regular deposit process with stock certificates have been obtained by private placement and your broker will have that instruction set out for you.

So the transfer agent will exercise for you. They'll either drop it inside a DRS advice or the Direct Registration System account held at the transfer agent or they can have it, the paper, shipped to you directly in the mail. But either way you want to get that back to the broker so that they can start the process of being able to prepare those common shares, to be sold for you on the open market.

Maurice Jackson: Are there restrictive legends on the warrants?

Tekoa Da Silva: This is where having a competent broker can come in because the broker may say, "Okay, here's the warrant exercise form, but also here is the legend removal form too. Send to us the legend removal form with the warrant exercise form so that we can have the restrictive legends removed at the same time or build it into our process to save you time." And they may say save you time and I think in most cases they could really mean it because saving time means saving four to six weeks. A question on time, it takes probably two to three weeks to have a warrant exercised and the process complete and have a common stock issued. And then this whole deposit process, my experience has been in that probably takes between four to six weeks to get a physical certificate deposited into a brokerage account and then it cleared through the legal review process.

Maurice Jackson: Are there any benefits of participating in the first tranche versus a second or third tranche?

Tekoa Da Silva: Well, now do you mean if an issuer publishes a press release about a private placement and they say tranche number one will close on, let's say, August 1st and then tranche number two will close on August 20th?

Maurice Jackson: Correct. Because that's a three week window there that the speculator is missing out on should the stock price accelerate and they may risk losing potential gains.

Tekoa Da Silva: That's a really good observation. I think it depends on the exact handling procedure that's going to be taken by the issuer. If the issuer is going to issue all of these private placements, the securities, at the end of the completion of both tranches and they're all going to be issued at the same time, one probably doesn't need to be too concerned about that. But if they are having multiple issuances along the way, you're absolutely right. The date that's printed on the back of your certificate may be the date that it's issued as well as some of the backups, the certificate, the restrictive legend, the four-month hold restrictive legend.

It may say that you may not be able to sell it until November 20th of, let's say, 2019. Your date may actually ended up being a couple of weeks earlier than somebody else down the line. And you're absolutely right that there could be a few weeks of a head start that that person may have on the others. So it really depends on the point on where these date deadlines fall. And then also the handling procedure that the broker that you use, how much time they need to remove the restricted legends. So it depends on the specific circumstances of the deal.

Maurice Jackson: Not to digress, but when you're looking at capital structures for company, you see outstanding and fully diluted. That's where this narrative changes. Can you expand on that, how that plays into this discussion?

Tekoa Da Silva: Yeah, that's a really good question too. Shares outstanding versus fully diluted. A company may have 100 million shares outstanding and if you want to do a calculation of the market capital company or the price for that business, if you and I were to buy that business in full today, if the shares are trading at $1 per share in the open market and there are 100 million shares, we know that the business is priced at $100 million. Now if we run off and start making subsequent calculations using that $100 million as our reference number for the price of the business in terms of what we're paying for what we get without looking at something like outstanding options, outstanding warrants, we, or one, could run the risk of overpaying without realizing it. Because what if behind that 100 million shares outstanding, there are an additional 100 million or 200 million options or warrants that are in the money or close to being in the money.

Depending on the strike price of the stock options and of the warrants. One needs to make a determination as to what they feel is a fully diluted market cap that's appropriate to that situation. They could do a straight technical viewpoint of it and say, "Well there's 200 million warrants outstanding, 100 million common shares. Let's assume that all the warrants are exercised and we'll use a $300 million market cap." A $300 million price for a business obviously is dramatically different than $100 million price. So taking into account stock options, warrants, the exercise price for all the instruments, which are usually published within the annual reports or the minutes, the MD&A, management discussion and analysis documents, is key to coming up with a responsible price for what you're paying for business.

Maurice Jackson: Ladies and gentlemen, this concludes part three on All About Private Placements. If you wish to have a conversation with Mr. Da Silva, email [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.

Part One of All About Private Placements.
Part Two of All About Private Placements.

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.


1) Maurice Jackson: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: Novo Resources. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company has a financial relationship with the following companies mentioned in this article: Novo Resources. Proven and Probable disclosures are listed below.
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