Private placements are offerings of stock in new or secondary issues that are not available on the public market. They are frequently sold at a discount to the market price and with attached warrants; and they are purchased in size (sometimes $100,000) and usually have restrictions on sale (sometimes as much as two years).
So though private placement can be a very advantageous investment (because of the pricing and the warrant), they are not without drawbacks and risks, and are clearly not for everyone. And they are not available to everyone.
Indeed, it is not an exaggeration to say that the private placements easily available are often precisely the ones you don't want!
We do like to purchase private placements, however, if we know the company or its principals. For whom do we buy?
First, private placement purchasers must be accredited under Reg D (meaning, they must have an annual income of at least $200,000 or a net worth of $1 million). For trusts, IRAs and other entities there may be special limitations on the type of placement that can be purchased (particularly, for example, with a new issue or private company not yet public).
The significant minimum investment requirement (rarely less than $25,000 and often $100,000) raises the bar for suitability. Even if a particular company is suitable for a client, an investment of such size may not be.
Private placements are often in new or early stage companies, whose outlook is uncertain, raising the risk profile.
The holding period of a year or more (four months minimum for Canadian placements) may make such an investment unsuitable for some clients, such as those who require frequent unscheduled withdrawals.
And often quick action is needed. So the client must have cash in the account, or cash ready to send, and must be available to complete the sometimes arduous paperwork. Trusts, corporate accounts and other entitles sometimes require additional paperwork and multiple signatures, and sometimes the time pressure itself works against completion of the required forms.
But assuming the client is suitable and has the cash, we would then seek approval of the client to make such an investment. Since private placements are not liquid, we never invest in them without specific client authorization. We maintain a list of clients who have expressed interest in private placements and use that list to screen for any particular placement.
If a placement includes shares and a warrant, we will look to sell some of the underlying shares when they become free trading in order to reduce our overall cost, and retain the upside of the warrants.
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