All About Private Placements - Part I

So you've got a CA$0.10 cent unit, which includes one common share and then one warrant on the inside. And the warrant, let's assume is exercisable at a CA$0.15 share price for a five-year period. That's what they would call a five-year warrant. Exercise for CA$0.15 for a five-year period. And this unit is priced at CA$0.10.

And let's just hypothetically assume also that the price of the common shares in the market, you'd be trading at CA$0.10, CA$0.11 or CA$0.12. So that's maybe a typical set of private placement terms that you may see in a public press release. But these days, because market conditions are a bit more buoyant, capital is generally available, you don't as often see five-year full warrants. You more often see 12-month, 24-month warrants, and quite often 12- and 24-month half warrants, as opposed to a full five-year warrant.

Maurice Jackson: Are private placement units sold at a discount?

Tekoa Da Silva: It may be. It depends on the appetite that is in the market for that issuer. If the cost of capital is a bit higher, they may offer it at a discount. If the cost of capital was temporarily low, like if there are surging prices, that placement unit may be offered at a premium in the market, because the market really want to have a warrant, and they're willing to pay extra for it. Or the unit may match the price of the market.

It really depends on market conditions and it depends on the people that the issuing company [is] tapping for capital. It could be like a number of specialist, natural resource and brokerage firms. It could include newsletter publishers, other types of capital raising groups. The more interest there is, of course, the lower the cost of capital, or the worse the terms for the investor speculating, and the better the terms are for the issuer.

Maurice Jackson: Now, Tekoa, I don't want to brag on myself, but I'd like to give a real life scenario here. So two years ago with a company, Novo Resources Corp. (NVO:TSX.V; NSRPF:OTCQX), they conducted a financing and it was at a $0.66, and then you had a full warrant, one year at $0.90. And we issued that financing opportunity to our subscribers. What occurred was Novo Resources, within four months, jumped to $8.55. That is a 1,400% return.

However, if you participated in the financing, irrespective of the current price, you were able to purchase the same quantity of shares that you purchased originally at $0.66, you could purchase them at $0.90, and that's the value proposition that we're trying to convey to you, regarding private placements.

I have one more question for you before we can conclude this first series and that is. . .what determines private placement terms?

Tekoa Da Silva: What determines the terms? Well, I think it's kind of like a combination between cost of capital conditions in the marketplace, in the bidding atmosphere that is generated as a result, and the negotiating technique of both sides. I think it can be competitive. I have to tell you, I haven't sat in on many private placement negotiations myself, watching two partners go at it. I'm usually one layer away from most of those direct negotiations. But I've seen some of them take place, I've been very close to and have participated in conversations in agreeing on price. And it can take as little as a few minutes of getting a sense of what both parties feel is reasonable, or it can be a more heated negotiation as some other people in the market may reference.

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Disclosure: I or members of my family own shares of Novo Resources.

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