When a company wants to raise capital without going to the public markets, they can choose to do a private placement which exempts them from the registration and prospectus requirements of securities being sold in a public market. The sale of private placements is generally restricted to institutional investors and sophisticated retail investors who are considered knowledgeable enough to make informed decisions and protect their interests without the assistance of a prospectus. Private placements issued by private companies do not trade on a public stock exchange. Private placements issued by publicly-listed companies usually trade publicly after a 4 month holding period. Some examples of securities available in the private market include limited partnerships, syndicated real estate and pooled mortgages, and investment funds.
Because private placements can avoid the time and costs associated with preparing and clearing a prospectus with the regulatory authorities, they are attractive to both publicly-listed and private companies. They are also commonly used by startup businesses in their early rounds of financing.
Since 2009, the amount of capital being raised every year in the private placement market (also called the exempt market) has grown consistently. From January 1, 2015 through April 30, 2015, $4.4 billion in equity capital has been raised through private placement issues by companies listed on the TSX Venture Exchange and Toronto Stock Exchange. That is an increase of 56% from the same time last year. The largest TSX Financing in Q1 of 2015 was a $1.8 billion private placement (Valeant Pharmaceuticals International Inc. - Life Sciences).
The exempt market is significantly larger than the above numbers would suggest. A huge number of exempt market placements are issued by private companies, and information on the placements can be hard to come by. In 2012, exempt market financings in Ontario alone totalled $104 billion . From 2010-2012, private placement financings in Canada totalled nearly $400 billion.
These numbers suggest that private placements are a very important part of Canada’s capital markets and that qualified investors are interested in exploring alternative investments that may produce higher rates of return than traditional investments, albeit at significantly greater risk.
There are several different exemptions under which companies can issue securities. The one that is most widely- used is the “accredited investor” exemption . Some examples of accredited investors are:
Potential to buy low, sell high. Privately placed securities are often sold at a discount to the market value in order to make them attractive to investors who are taking a greater risk and assuming an illiquid position. If the securities appreciate in value, investors may reap huge rewards for assuming higher risk.
Exposure to unique market segments. The cost of going public in Canada is high. Private placements help small and mid-sized companies and new ventures because they minimize the legal and regulatory fees they would pay if they were to raise additional capital in the public market.
Diversification. Adding private placement investments to a portfolio can help to diversify that portfolio because such alternative investments typically have a low correlation to traditional stocks and bonds.
Risk of Loss. You could lose the entire value of your investment. Investing in private placements requires high risk tolerance.
Liquidity Risk. Private placements issued by private companies are not publicly traded. Private placements issued by public companies are usually subject to a 4 month holding period resale restriction. If you invest in the private market, you may not be able to get your money out when you need it. You should be prepared to have your capital tied up for long periods of time.
Lack of Transparency/Information available. If a private company is issuing a private placement, information on the company may be lacking. It is imperative to conduct your own due diligence and investigate the company and its financials prior to committing.
If you are interested in learning more about private placements, please talk to your Advisor. Sprott Private Wealth reviews private placement opportunities on an ongoing basis and, when the appropriate opportunity presents itself, such opportunities are made available to our clients
Effective 2015, the TFSA Annual Contribution limit has increased from $5,500.00 to $10,000.00. If you have not made your annual contribution, you may now do so at the new limit of $10,000.00. If you have already made your contribution to the previous limit of $5,500.00, you may now top up your contribution by $4,500.00.
For more details,
please visit http://www.cra-arc.gc.ca/tfsa/
We are pleased to announce that effective immediately, you’ll find significant improvements to your Sprott Private Wealth online account, now called MyPortfolio+.
The enhancements you will experience include:
For more details, please visit: sprottwealth.com/account-access/. To start accessing MyPortfolio+, you will need to register a new user ID at www.my-portfolio.ca. Should you have any questions about registration, please contact either the Technical Support Desk at 1-855-844-0172 or your advisor