What is Private Placement?
Private placements are transactions whereby a company issues new shares and sells them privately. Both private and public companies can do these transactions. For example, if ABC Company is 100% owned by Beth Smith and she wants to bring in an investor, ABC Company could issue shares to the investor in exchange for cash. If Beth owns 100 shares in ABC before the transaction and ABC issues 100 shares to the new investor for $10,000, both will own 100 of a total of 200 shares or 50% of the company after the transaction is complete.
Among junior resource exploration companies, private placements are frequently done to raise new capital. The new capital is the used to do more exploration or perhaps start environmental studies or even start the process of going into production. For example, DEF Exploration Inc. might have 10,000,000 shares issued and be trading at $0.10 on the TSX Venture Exchange. By issuing an additional 1,000,000 shares at $0.09 per share, the company increases the total shares issued to 11,000,000 and raises $90,000 which then becomes new working capital.
As with IPO’s, there is often a broker involved with private placements. In the example above, the broker might receive a fee of $4,500 and 100,000 warrants priced at $0.09 which can be exercised at any time over 2 years. However, sometimes private placements are “non-brokered” in which case the shares are sold directly by the company.
In order to buy shares of a private placement of a public company, you must meet the requirements for participation as determined by securities commission that regulates the exchange that the company is listed on. For example, if you live in British Columbia and you wish to participate in a private placement of a company that is listed on the TSX Venture, you must fit into certain categories such as family, friend or business associate of an officer of the company, an employee, director or officer of the company or be an “Accredited Investor” as defined by the BCSC.
Talk to your broker
The best way to participate in a private placement is to talk to your broker. If they cannot purchase shares in the private placement for you, you may need to talk directly to the broker who is responsible for selling the shares and potentially open an account with that broker. If the private placement is “non-brokered” and you do not fit into one of the accredited investor categories, you cannot participate in the private placement.
If the private placement is for a company that whose shares are not traded on an exchange (a private company) there are fewer rules regarding who can invest. But of course, it may be much more difficult to set a value on your investment and also difficult to sell your shares if you want to divest from the company. Again, the BCSC web site has a page on that topichttp://www.bcsc.bc.ca/alert.aspx?id=6598. Also, it is important to talk to your broker about private investments – they should be able to advise you on tax free savings accounts, RSP eligibility and other issues that can affect even investments in private companies.
Reference : http://resourceinvestingnews.com/what-is-a-private-placement
