The Maven Letter is about opportunities that I see to buy and sell exploration and mining stocks in the open market.

Purchases in the open market, however, only represent about half of what I buy. The other half of the stocks in my portfolio come from financings.

I have discussed the pros and cons of financings before. In short, financings offer the following advantages:

• Warrants – most financings include a warrant or half warrant with each share. Warrants give you the right to buy stock down the road at a set price. If the stock does well, they let you increase your position at an earlier, lower price.

• Scale – buying in a financing is a great way to establish a good-sized position without influencing the share price. Trying to buy 50,000 shares of a thinly traded stock in the market often drives the price up, but one can buy large positions in a financing with no effect.

• Private and new companies – the only way to get a position in a private company is through a financing. When private companies go public they complete a concurrent financing (the Initial Public Offering or IPO raise); those financings are the way to establish a solid position at a known cost base in a new company, which is desirable when the new co is likely to run up immediately.

The disadvantages include:

• Hold period – shares bought in a financing are usually restricted from trading for four months. If the stock runs or tanks during that time, financing investors can’t take advantage or ditch out. Then, at the end of the hold period, a slew of shares at the same cost base come free trading on the same day. The usual result: a stock that gained moderately during the 4-month hold period will trade back down to or near the financing price when the hold comes off as financing investors take profits.
  • This effect is exaggerated when the financing included warrants, as investors will sell for even a small profit and then just hold the warrant as their way to get exposure should the story work.

It’s really all about the warrants. At the start of a new gold bull market, you work to buy as much cheap stock as possible. Buying that stock in financings that include warrants means you not 2 only get cheap stock but you get the right to buy more cheap stock later (often years later) if the company does well.

I don’t buy a lot of private companies because I like to be able to sell, but the ‘new company’ angle has been in play a lot lately. I have invested in three IPO or spinout financings in the last month and am about to put money into a fourth. All are stocks that I think the market is going to really like, which means I want to get in at the listing price rather than fighting for stock in the market once it starts trading.

OK, those are my reasons for investing in financings. In this article what I actually want to focus on is how specifically one participates.

I was moved to write this after corresponding with several subscribers who were interested in Maven Premium – learning about financings in which I am investing – but who have not invested in private placements before. Their questions reminded me that the process by which financings happen is not obvious.

Let me answer those questions so that anyone else who is interested in the financings side of this business understands what they are considering. Knowledge is power!


The What and How

Financings are the raising of funds through the issuance of new shares. From 20,000 feet, the process has only a few steps: a company announces a financing, interested investors put up their hands, allocations are divided out, investors submit paperwork and cash, and then the financing closes and investors see new shares show up in their accounts.

Look a little closer, though, and things are more complicated.

First: companies usually want to raise money at as high a price as possible to limit share dilution…but sometimes things are going on behind the scenes, such as discussions to bring an important investor on board, that prompt the company to raise capital at a discount. It can also be tough to convince investors to take big positions in a financing that’s priced right after a share price has gone on a steep run. So financings are priced at, beneath, and at times above market.

Most financings include a half warrant with each share. Sometimes it’s a full warrant; sometimes there is no warrant. When they are involved, each full warrant can be converted into a share at a set price for a set period of time. For instance, a $0.30 financing might include a half warrant exercisable at $0.45 for two years. If the bet works – say the company drills into a discovery and the price jumps to $0.80 or $1.20 – investors who participated in the financing can exercise their warrants to buy shares at $0.45 at any time during those two years, even though the stock is trading much higher.

Finding money is hard work. Management talks to people they know are already in the stock to see if they want more; they call up every interested party they’ve met with in recent months; they encourage brokers to suggest the raise to their clients; they implore active investors with big networks to pick up the phone. Some financings fill quickly; others are a slog. You can gauge how interested the market is in a company by how long it takes them to close an announced financing.

To avoid that scrutiny, companies with good access to capital will often fill the book before they even announce the raise – and then they’ll simply announce a closed financing.

Then there are brokered and non-brokered financings. A brokered financing goes through an investment bank, which means – or is supposed to mean – that the bank helps finds investors. In exchange, the bank gets a percent of the funds raised. Non-brokered financings are possible when a 3 company has on its own found investors who want to put money in; not needing help from the bank also means the company doesn’t have to pay the bank.

Bought deal financings are a particular kind of brokered financing where the bank guarantees it will find investors for the entire financing. When a company announces a $13-million bought deal financing, you know that they will for sure raise at least $13 million because the bank running the book guarantees it (and will soak up any shares they can’t find homes for itself).


Who Can Participate

For many years Canadian rules stipulated that only accredited investors could invest in financings. To meet that bar one has to check off at least one of a list of characteristics. Most of them are irrelevant to retail investors, such as being a business development bank or an insurance provider.

The ones that matter are:

• An individual who beneficially owns, or who together with a spouse beneficially own, financial assets having an aggregate realizable value that, before taxes but net of any related liabilities, exceeds $1,000,000;
• An individual whose net income before taxes exceeded $200,000 in each of the two most recent years or whose net income before taxes combined with that of a spouse exceeded $300,000 in each of those years and who, in either case, has a reasonable expectation of exceeding the same net income level in the current year;

Many people who are interested in Maven Premium start by asking me whether or how I confirm their status as accredited investors. The answer is: I do not. It’s none of my business! That said, to actually participate in most of the financing opportunities I offer one does have to be accredited.

The check for that status rests with the bank through which you process the investment. Put simply: the forms you fill out for the financing include a statement whereby you confirm your accredited status. You sign that form; the bank processes it and the bank’s compliance department checks, if they see a reason to do so.

In recent years, Canadian regulators introduced several exemptions that allow non-accredited investors to participate in private placements. One exemption allows existing shareholders to participate in financings up to a maximum of $15,000. The company raising money has to be proactive about this and include the existing shareholder exemption in its financings documentation.

The other key exemption relies on “suitability advice” – if a registered investment dealer (broker) states that they believe the financing is suitable for the client, the client can participate despite not being accredited. Again, this works as long as the company has included the suitability exemption form in their financing paperwork.

There are two other kinds of financings that do not care whether you are accredited or not. They are Prospectus Issuances and Direct Listing Initial Public Offerings.

Prospectus offerings are straightforward financings; Direct Listing IPOs apply to companies financing for an initial listing, as opposed to companies that are already trading. Both are distinct because the company has jumped through extra hoops ahead of time – specifically they have had the offering cleared by Securities regulators – that mean the financing

(1) does not have a 4-month hold,
(2) is open to non-accredited investors, and
(3) requires almost no paperwork from participants.

If all of that sounds better – it absolutely is. The problem is that Prospectus offerings and Direct Listing IPOs are considerably more expensive and time consuming than regular financings, which is why most junior companies don’t bother. They also don’t often bother including the forms for existing shareholders or suitability exemptions, which limits them to finding funds from accredited investors.


Banks and brokers

I know many of you trading exclusively through online portals, either with major banks (TB Webroker, Royal Bank, CIBC Investor Edge, etc) or through web-based investment portals like Credential Direct. That arrangement means you do not have a broker.

One can participate in financings within that setup but it takes extra work.

You have two options. One is to fill out the financing forms and then submit them physically to a bank branch. The bank then has to verify everything, which often takes 10 days or more (which in many cases is too long, as the financing is already closed). In addition, several banks just won’t approve investments in high-risk junior explorers. If they do approve the investment and get it done in time, then they take care of moving the money and accepting the shares and warrants into your account.

The other option is to submit the forms and wire the company directly to the company. This bypasses banks completely. It means that you get physical receipt of your shares and warrants, however, so you then have to ensure you deposit them into your trading account (losing share certificates is not a good idea!).

I should note here that Direct Listing IPOs and prospectus offerings are also attractive from this angle. If you want to participate in a Direct Listing IPO or a prospectus offering and you only trade online, you call your bank. You may not have a dedicated broker but there is a group of brokers at the bank responsible for all online clients and you talk to one of them. You explain the financing and get the broker to call the investment bank running the deal (Haywood or Canaccord or PI or Leede Jones Gable or the like). The investment bank then facilitates the transaction.

Not every online platform is willing to do this, I should note. In recent raises where I’ve asked, Royal Bank has been reticent while TD and CIBC have been amenable.

At the end of the day, investing in financings is just way easier through a broker. I don’t mean someone at TD who answers the phone after you’ve been on hold for an hour; I mean a registered investment dealer at an IIROC bank.

IIROC stands for Investment Industry Regulator Organization of Canada. Investment banks with IIROC certification have the most capabilities to get things done, for both clients and companies. The investment banks I listed above – Haywood, Canaccord, PI Financial, Leede Jones Gable – are all IIROC banks. And they have full rosters of dedicated brokers.

I’m emphasizing that because several folks commented to me recently that they didn’t think brokers existed any more. They most certainly do! I know dozens of brokers who spend their days trading shares for their clients, while also processing financing paperwork, helping find investors for companies raising through their bank, and advising companies on deal structure, raising money, and all things capital markets.

I personally would not participate in financings if I did not have a broker because I don’t have the patience to run around town with forms or to sit on the phone convincing a big bank to let me. I actually have several brokers, but what matters is they and their banks get my forms through the process for me. I simply submit my paperwork; between my broker and the bank’s financing 5 department they check and submit my forms and then the shares and warrants show up in my account.

Yes, brokers charge a processing fee for doing the work but it is so worth it. Not only do they make financings far easier but they oversee your account. If a stock that you forgot you own goes on a run, your broker will call you. If warrants are in the money and expiring soon, your broker will remind you. If a 4-month hold is coming off and the stock is well up, your broker might set up a short account, which lets you sell the stock into strength before it actually comes to trade. An active broker is a strong investing ally.


Summary

• If you are accredited, you can participate in any financing.
• If you are not accredited, you can participate in:
  • Financings where the company has included the Suitability Advice exemption (you need a broker at an IIROC bank to support your suitability)
  • Financings for companies where you are already a shareholder and the company include the Existing Shareholder exemption.
• Prospectus offerings Direct Listing IPOs Prospectus offerings and direct listing IPOS are great because they do not include 4-month holds, allow anyone to participate, and involve almost no paperwork. Unfortunately, they are a lot more work and cost for the company so they are not common.
• To physically participate in financings:
  • If you have a broker at a dedicated investment bank: you submit signed paperwork to your broker and ensure there is cash in your account. They deal with everything else.
  • If you trade through the online platform at a big bank and it’s a direct listing IPO or a prospectus offering: you call your bank and ask a broker to contact the investment bank that is running the financing. That investment bank can facilitate the transaction as long as your bank is amenable to the idea (not all are)
  • If you trade through the online platform at a big bank and it’s a normal financing: you submit your forms to your bank and hope they approve the investment and do so in time, in which case the bank moves the money and accepts the shares into your account, or you submit forms and wire money directly to the company, in which case you receive physical share certificates that you have to deposit into your account.