All About Private Placements: Check Off the Boxes to Protect Your Investment

Source: Maurice Jackson for Streetwise Reports 03/01/2020

Proven and Probable’s Maurice Jackson and Sprott USA financial advisor Tekoa Da Silva discuss the common mistakes investors make in securing private placements.

Maurice Jackson: This is one interview in a special four-part series entitled All About Private Placements. Joining us for conversation is Tekoa Da Silva. He is an accomplished licensed financial advisor for Sprott USA, the preeminent name in the natural resource base. Full disclosure, the following is not a Sprott USA-endorsed product, and it is for educational purposes only.

Tekoa, what are the most common mistakes you see when people buy private placements?

Tekoa Da Silva: Boy, what a wonderful question. The first one that comes to mind is buying a private placement when an individual’s legally, technically, not qualified to be able to do so. What comes to mind is a young man that I spoke with once who was looking for someone to assist him with depositing his private placement securities. There is contract that you have to complete in order to buy the private placement. We discussed his net worth and I found that he was not an accredited investor. And I asked him how he was able to buy those securities not being an accredited investor, because the issuers, at least from a North American context—these natural resource mining share companies—in most instances [have] to verify in the subscription agreement there. The issuing company asks you to check off all the boxes indicating that you’re an accredited investor. And if you don’t check off those boxes, they don’t sell you these securities. They don’t sell you the private placement.

But somehow this young gentleman—he had these securities. So I thought that somewhere in the process, maybe the issuer made a mistake or maybe he made a mistake, but he somehow bought these things not being accredited. And my understanding was that he couldn’t find any broker—any specialist, a resource broker who could do your private placement deposits—who could help him. So he was trapped. His money was stuck inside the security because he was unaccredited.

So that’s the first mistake, I would say. Confirm with the issuer. Do we have to be accredited? And if they say yes and someone’s thinking, “Well, what proof needs to be provided indicating that I’m an accredited investor?”

Do you need bank statements? Do you need any proof? The issuer says, “No,” and the person may think, “Oh well,” maybe fudging the documents or something like that just to be able to buy it. Don’t do it. Don’t do it. Tell the truth, because you don’t want your capital to get stuck inside of security that can’t be liquidated. So always confirm and don’t make that mistake.

The next mistake that I would say is pretty common that a person could make is buying into a private placement, obtaining a. . .physical security, without first having a destination, a home with which to deposit the security. I came across a gentleman who is based in a country, a wonderful country that I’ve traveled in and visited; it’s a great place. But from a banking standpoint, there are some North American clearing firms or broker dealers that don’t want to do business with certain regions or residents in those regions.

And so this gentleman said, “Hey, I’ve got this private placement security, can you deposit it for me?” I said, “Well, I can’t; maybe another broker can.” Not because I don’t want to, but because the clearing firm doesn’t want to because that country is not within their grouping of accepted jurisdictions.

So you want to double check with the broker that you use. After you open the account, say, “Hey, I’m a resident of this country. Is there going to be any problem?” Double check this before you put your money up to buy the security. So that’s the second most common mistake that I’ve seen.

The next common mistake that I’ve seen [happens when] they really like a company, and they want to support it multiple times by private placement over the course of a couple of years. So let’s just say that they keep their shares. They don’t deposit them in a broker dealer account every time they do the private placement, but they just keep them at home in a safe deposit box or something like this. They do multiple product placements, and in each of the product placements, they buy the exact same share count.

So, let’s say you do three private placements in the company. Let’s say an individual bought their private placement there three times, and every time they bought 50,000 shares. That’s wonderful. They’ve got a great position of 150,000 shares and hopefully 150,000 warrants. But what happens is, if a person rushes then to go deposit all three of those private placements at the exact same time with their broker dealer, the administrative staff—they get these three deposits all matching of 50,000 shares. And what they need to do is they need to build a legal case for every single one of them. They have to find the proof of purchase, they have to have copies of the original subscription agreements. And if every single one of these has matching share accounts, the administrative staff cannot easily identify between all three of the private placements without reading out long numbers of saying something like yes, private placement number one, which is the security number XQZTY5000, and that’s having to communicate with each other all day long.

So I would suggest instead of doing three private placements for 50,000 shares each, do three private placements and number them this way: 50,100 shares, 50,200 shares, 50,300 shares, so the administrative staff can quickly identify amongst each. Because they’ll have three to four employees at each of the layers—each of the financial organization layers are going to be touching this thing and communicating with each other. If you number them that way, they can say, “Oh yeah, placement that’s marked number 150,100.” Boom. They can pull up all the old paperwork and help you faster, because the last thing you want is administrative staff in some part of the processing, saying “You know what, this is just. . .I’ve got to push this aside and do some other work right now.”

Maurice Jackson: Well, it also raises eyebrows, does it not? Because it could be there’s a question of, is this an illegal certificate I’m receiving, is this something counterfeit? And you referenced something else I don’t think we’ve covered so far. And that is you do have to have proof of purchase?

Tekoa Da Silva: Your broker dealer can walk you through the legal package that you need to assemble every time you deposit private placement, obtaining security. And just for reference, that’s going to be your subscription agreement. It’s going to be your proof of purchase and it’s going to be the access security itself along with anything else that they have, that they ask for.

Maurice Jackson: We’ve covered companies predominantly on the Toronto Stock Exchange that are public companies. Are we able to participate in private placements through companies that are pre-IPO?

Tekoa Da Silva: I would say that this is an extension of that question of what are some of the worst mistakes the person can make when participating in a private placement. . .still assuming natural resource exploration, development-stage companies, [and that is] participating in a private or pre-IPO entity and being a nonprofessional, or participating in a company in which you don’t have a high level of assurance from the issuer or from the broker that this company is actually going to go public someday. If a person is a busy professional, and they’re not working with real pros in terms of the issuer that they’re working with, like skilled entrepreneurs, where they’re good for their word. And then also, a broker dealer [is] the same way, where they know how to handle private and pre-IPO private placements.

If they don’t have those two things involved and someone solicits them with an opportunity like that, I would say be very careful. Because if they don’t go public, you may never get your capital out back from that security; it’s stranded on an island. And then also, it could take longer than expected.

One example comes to mind of a company that I observed in 2014 that said, “We’re going to be going IPO public sometime soon, when we get a little bit of recovery in the market.” That same company—now it’s five years later and they’re still private. And the person that participated in that private placement, along with others that I’ve seen, is still waiting. And then, in the meantime, anything could be going on with that company. Personnel could be coming and going, their financial situation could be deteriorating. And then the person who owns the stock certificate bought by the private placement could have changes going on in their own personal life.

The next common mistake that I see people make—this one is so huge—and that is, losing your supporting documents that you obtained when you did your private placement at the beginning. Your supporting documents [are] your [copies] of the executed subscription agreement—that 30- to 40-page document that you filled out. It’s going to have your signatures and information on here, and [it’s] going to have the company’s, the issuing company’s signature on there, too. You can’t lose that document. Because these days, if you lose that document, you may have a broker say, “Well, according to anti-money laundering laws, we can’t deposit this from you, because we don’t know that this came from a legitimate source.

And in the same thing, if a proof of purchase—if you can’t prove that you got a bank statement or a wire receipt, some other transference of money documented by a real bank—the broker dealer could say, “Well, we can’t document or we can’t prove to our compliance department that you didn’t pay for this private placement with a suitcase full of cash obtained from some strange circumstances.”

So. . .never lose your supporting documents. . .Keep a scanned copy in your records, keep a physical copy if you need to. And then if there’s a third party, such as your broker, you could e-mail them copies of all the information, and they’ll have archived email records. At least they should, which will keep a permanent copy in your records to see you don’t lose them.

Another common mistake here too is losing your security certificate or your stock certificate, your debenture, your warrant certificate. You want to try not to lose those things. It’s not the end of the world if you do, but guess what? Getting a new copy, it’s a hassle. It could take anywhere [up] to 10 weeks dealing with the issuer and with the transfer agent, getting that security reproduced. And it could cost you money. . .though the $600 is a good budget for third-party administrative fees.

But in the meantime, through that 4 to 10 week process, anything could be going on with the stock. It could be exploding, it could be collapsing, there could be all types of things going on, and you just don’t want to do that to yourself. So make sure to keep the certificate in a safe place. If you’re going to keep it in your possession, I would suggest having a pretty good system in place for possession of those, or immediately get them to your broker dealer. Because they’ll have a bolting system, or at least they should, with their clearing firm keep them really safe and secure.

The next common mistake that I see people make in private placements is buying in a registration name that is different from a brokerage account name that they may use after broker. Okay: What does the registration name? Registration name or registrant, that’s simply the name that gets printed on your security. So if you’ve got a security, Maurice, in let’s say Novo Resources Corp. (NVO:TSX.V; NSRPF:OTCQX), a private placement says Maurice Jackson, the registration name is Maurice Jackson. But if a different name is printed on that security. . .

Maurice Jackson: Let’s use Proven and Probable. . .

Tekoa Da Silva: Proven and Probable. . .that’s a different registrant. It’s legally a different party. So if we were to talk to a broker about it, with a brokerage account that matched your personal name or my personal name or the name of a business, they may say, “Whoa, we understand that you own both, but they’re not compatible with each other.”

So, in order for a person to deposit the private placement security that’s in your name or the business into the vice versa brokerage account they have, they may say, “Well, we could do it for you, but first you’re going to have to send that placement security back to the transfer agent and you get it reissued, get everything printed, and get the opposing name printed on the certificate.” And then someone says, “Okay, sure, it sounds nice and easy. How long is that going to take?” Four to six weeks. So two weeks sending it both directions. It’s four to six weeks, reprinting it and then another, potentially—who knows how long—two to four, six weeks of a deposit process that the brokerage account, the broker firm, may have redepositing that security again.

So be careful. Check with your broker first. What’s the exact legal name of my brokerage account? Does my private placement, my registration name for the private placement, need to match exactly and precisely? I just want to have this confirmed before I do it. That way you can avoid costly time errors that come in down the road.

Maurice Jackson: And another option would be—which is not one that people really want, because you don’t want open up a second account—but the other option may be then just open up a personal name account with that broker and a business name. And then you can toggle between the two, whichever is appropriate for the name on the actual share certificate.

Tekoa Da Silva: Yes, sir. That’s another route that a person could take. But I’ll tell you, in some crazy market conditions, and resource markets, they can oftentimes can be exploded, or they can be completely dead. But when you’re moving in a period of explosive market conditions, if you’re working with a small, specialist, resource firm, all their staff [is] inundated with paperwork, with phone calls, with just things going haywire. And you don’t want to be caught in a situation like that unprepared, with having a wrong account. So way in advance, doing what you just said, having an extra account already created if needed—I think it’s a very good idea.

Maurice Jackson: So timing and being prepared are the two components here that are intangible, [and] really you’re sharing words of wisdom, the experience you’ve been there. You’ve seen it; you’ve heard the profanity on the other end of the line, I’m sure. Do you have another example for us?

Tekoa Da Silva: Oftentimes the junior resource space companies are going through mergers and acquisitions, or need changes, or the share structure changes, where there may be a 10-for-1 rollback or a 100-for-1 rollback. And if you’ve got that share certificate in your possession—the name of the company and the number of shares or security, a quantity on a certificate—it can’t immediately be produced for you unless the company takes it on their own to send you a new certificate immediately in the mail.

So what happens is, the change happens but your certificate stays the same and your broker may say, “Oh well, you could send it in when it’s convenient for you, and we’ll just make that adjustment when it gets here.” But what happens if six months down the line, the company makes another change, another share structure adjustment, or another M&A, and then another and then another.

Maurice Jackson: These do happen. This is a realistic scenario that you’re providing here.

Tekoa Da Silva: Yeah. You know, we saw this happen with a very successful company and successful management team. I think it was Equinox Gold in its early years; I believe it was Trek Mining, and then JDL Gold. So they had multiple changes down the road. And I, just off the top of my head, can’t recall if they had share structure changes along the way, too.

What I’m saying is when you see that name change or the share structure change, get that security deposited and update it as fast as you possibly can. Because if it’s two, three and four changes down the road, the administrative staff, the legal review department, what they’re going to do is they’re going to say, “You know what, in order for us to verify all this, it may take a month or longer.” So they may just say, “Hey, we’ll get it done when we get it done.” And it could just be a much more time-consuming process than it otherwise could be the case if you immediately moved when you saw that change happen.

Maurice Jackson: And if I can interject here, but then you miss out on what could potentially be an arbitrage opportunity. And they’re not long, but you have to be prepared, and that’s something we’re emphasizing here. It’s timing and being prepared and having a plan.

Tekoa Da Silva: Another common mistake that I see made during private placements is if a person is of the opinion that at some time in the future they may be passing on their securities to their heirs, that that time has come, and they own physical certificates of companies. I think that could be a smart idea, in consultation with their managers, to consider getting those securities deposited and put in a digital format in the individual’s name or in the name of a trust or whatever entity is in question. Because if a person passes away and the securities are still in that person’s name that passed away, you have a period of time where that can be so fairly quickly handled and I think one wants to move quickly in that circumstance.

Because what happens if one doesn’t move quickly? Well, you may have an M&A, you may have a restructuring change, you may have another change with any structure of errors, or another manager coming in to manage the estate, or simply time passes. I saw circumstance where a person had securities decades old and the various people that I talked to in that circumstance, simply had no idea how to assist that individual. And various industry people that I spoke to with circumstances like that say, “Well, you may have had people out there who own securities from the ’30s, the ’40s, the ’50s. And what happens is, you have to research the ownership chain, all the entities that came and went throughout that process, in order to recover that money.

And if you don’t have a person or a group that’s willing to go through the legal history review, the capital could be permanently lost. . .I see is if you have a change in the living parties, or the heirs share certificates. If you see that’s coming, immediately get them deposited, put into a digital format, maybe convert them into cash or something like that so you can conveniently pass along those assets to the heirs so that you can avoid them being permanently lost.

Maurice Jackson: These are wonderful gems that you’re sharing with us. I should say, golden nuggets of wisdom, because it really makes a difference for someone if they’re not aware in thinking the entire process out.

And you have to respect the process because it is a process. The market doesn’t move when we want it to move. And when I say the market, it’s not just the prices of shares, but it’s also behind the scenes. What we’re discussing here in this format is the process to take it from that certificate format to direct registration to street name. It is a process and if you don’t respect the process, you will get stressed out. You will be upset, and if you understand what’s coming before you, you can be better prepared. And that’s exactly what we’re trying to do here.

And again, this is not legal advice. This is not financial advice. This is simply an education format that we want to provide to you regarding the value proposition of private placements. Did you have another one for us, sir?

Tekoa Da Silva: No worries. Those I would say pretty much cover the most common mistakes that I’ve seen in regards to private placements.

Maurice Jackson: Well, Tekoa, we’ve covered a lot of material here. What are your closing thoughts or words of wisdom that you’d like to share with anyone regarding private placements?

Tekoa Da Silva: Well, I’d think about it very carefully before doing it. I think understanding that the process of participation is probably a one- to three-year commitment. Going about thinking of trying it out for one to three months to see if it fits may not be too helpful. Within the one- to three-year period, one really needs to find the right people to work with. Find the best sources of information for the pipeline of opportunities, the best people to work with in terms of depositing the securities and handling the cash—people who are competent at that and who can also help you vet those deals that you may find on their own.

Those individuals, from an administrative standpoint, can really help you, step-by-step guide you through the process, to help protect you from losing your money. I think that’s what I would say. Definitely [don’t] not be shy about mapping out the entire process and talking to all those parties, talking to multiple sources within those different groups, so that you can have the whole thing [thought] out, even if you decide not to do it. I think that’s probably the best advice that I would suggest.

Maurice Jackson: Ladies and gentlemen, this concludes our series All About Private Placements. If you wish to have a conversation with Mr. Da Silva, e-mail If you want to find out which private placements have our attention at Proven and Probable, simply visit Place your correspondence in the subscribe box and let us know that you are accredited. Subscription is free and we do not share your correspondence with third parties.

Maurice Jackson is the founder of Proven and Probable, a site that aims to enrich its subscribers through education in precious metals and junior mining companies that will enrich the world.

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