What is a Private placement?
A private placement (PP) is a way for a company to raise capital by creating new shares of the company and selling them to investors, and an opportunity for an investor to buy shares of a company from the company itself, usually at a discount to the current market price of the shares.
A private placement is only available to be sold to certain groups of people as per rules from the securities regulators. These groups include:
- directors, officers, employees or control persons of the issuer;
- family members (spouse, parent, grandparent, sister, brother or child) of the directors, senior officers or control persons;
- close personal friends or close business associates of the directors, senior officers or control persons
- current security holders; and
- accredited investors.
Private placements can be either brokered or non-brokered, meaning either a brokerage firm puts together a group of subscribers from their client list and receive a commission or the Company finds investors for the offering themselves through their contracts and networks.
In order to make private placements more appealing to investors, the Company can offer a warrant, which gives the investor the right, but not the obligation, to purchase additional shares of the company at a set price, and only for a set period of time.
At any time before expiration, the market price is higher than the warrant price, the warrants can be exercised into shares and sold into the market. Warrant holders will generally only exercise the warrants if the market price is higher than the warrant exercise price.
Buying shares in a private placement is risky, but typically not more risky than buying shares on the market. When buying in a PP, you usually get a discount to market price, you may get warrants, and you won’t have to pay a commission to your broker to buy them.
However, all private placements are subject to a 4 month hold period, during which you are restricted from selling your shares or exercising your warrants.
Private placement proceeds are typically used for general working capital or specific projects as determined by the Company. A special type of private placement, a flow-through private placement (FT-PP), is an option for a company that has mining properties and makes significant expenditures on the property.
In a FT PP, the company raises FT funds that are specifically meant to the be spent on eligible exploration expenses. These eligible exploration expenses typically provide tax credits for the company, and by issuing tax receipts for the value of FT shares acquired, the tax credits are passed on to the investor.
If you’re interested to learn more about Private Placements, contact one of our Investor Specialists at Zimtu Capital. But before you invest, it is always best to get advice from your own investment advisor.