Feb. 22, 2023
Editor’s Note: Have you ever wanted to participate in a private investment but don’t know where to start? Do you know if you’re an accredited investor? How do you go about finding quality private deals to invest in? We were there once, too. Everybody has to start somewhere. But now that we’ve done dozens of private deals, and made millions along the way, we can share a bit of what it takes to be successful. In the discussion below, Gerardo Del Real and I do just that. I encourage anyone to check it out who is curious about private placements, how to find them, how to participate in them, and why they can be so lucrative.
Gerardo Del Real: I think private placements and deal flow is a great place to start. You and I are always looking to finance early-stage companies with tiny market caps, tiny floats, and good solid share structures.
A large reason why we did so well last year was how well we did with private placements. And I don't say that to brag. I don't say that to rub that in anyone's face. But anytime you have a deal like a Patriot Battery Metals, all you need is one of those every couple of years. And if you put a substantial amount of capital in there, you're going to do very, very well.
But what gets a company like Patriot Battery Metals to go from 16-cents, where we first financed it privately, to $17?
Well, there are many different boxes that you want to check off early on to see if a company has the potential to be a good private investment candidate. Questions I ask are:
- Does the company have a solid share structure?
- Does management have experience in the sector they’re pursuing?
- Does the opportunity have scale?
I can't preach this enough. I really am being so much more cautious with my dollars and making sure that I'm more aggressive when I invest privately in projects. My dollars are only going to projects that have scale. If you don't have scale, you're limiting your upside. There is nothing wrong with 200% or 300%. You'll do very well if you continuously pick 200% and 300% winners. But man, you get a 10,000% winner — that can change your life. And you’re not going to do that with a company that doesn't have the potential for large scale. For private mining investments in particular, which is where my expertise is, it's hard enough betting on geology. It's hard enough betting on jurisdiction. You're really handicapping yourself if you're not picking companies with the potential for large scale.
I just wanted to lead with that and pick your brain on what you look at and what you check for when you're investing in private deals. We eat our own cooking. Let's be honest, you and I have made a whole hell of a lot more in the last couple of years from our personal private investments than anything else. It feels good to win alongside subscribers and I am proud of that. I know you are too.
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Nick Hodge: Yeah. I look for many of the same things. We were both mentored by the same individual. I’m big on share structure, big on jurisdiction, which is increasingly important in the world we live in. It’s important to look where the company and its assets are located as well as how they're structured. But also where they fit in the overall trends of things. I try to invest in things that have the trend going as well. Patriot Battery Metals, which we've talked about a lot, might not have been successful if lithium wasn’t doubling year over year and up a 1,000% in the past five years, right?
You have to make sure you get the overall trend right too. And trends come and go, I've had success with private cannabis deals in the past, with real estate deals, with deals in other sectors, technology or biotech or whatever. So you need to make sure that the trend is your friend, as they say, and if you're getting into private deals that they fit somewhere within the trends that are going up.
Can You Participate in Accredited Investments?
What I wanted to discuss, and I'll kick it back to you, is how you get started. How can you get into private placements? It's not like someone knocks on your door and says, "Hey, here's this private placement, you should participate."
You have to first of all know that they exist, which some investors, and in fact probably the majority investors might not be familiar with how that works. And then you have to be an accredited investor, of course, at least for true private placements, which means you meet certain definitions. And there's a lot of them, probably 15 or so different ways you can be an accredited investor. But the most straightforward way is to make $200,000 a year in income by yourself, $300,000 with a spouse, or have a million dollars in net worth not including your house…
Gerardo Del Real: Or you can just check a box.
Nick Hodge: Well you almost have to tiptoe around that, right? Let me share how I started investing in private deals and then you can share your story.
It goes like this… We each write a monthly letter. You write Junior Resource Monthly and I write Foundational Profits. We also each write a more speculative letter or a trading letter. Yours is Junior Resource Trader. And mine is Hodge Family Office.
And then we each have a private placement service — Junior Resource Insider and Hodge Family Office Private Intel.
So if someone's just getting started, and they sign up for our monthly service… How do they get from there to becoming an accredited investor and writing a check into a private placement?
For me it was just learning over time. And learning the hard way in fact, because in the junior mining space, one of the things that some promotional teams look for is liquidity, particularly four months after they've done a recent private placement, which is when those shares become freetrading. And to take a step back and explain that for a second, some companies aren't mining anything but shareholder's pockets. They raise capital, they do private placements to fund their salaries, essentially, not to put it in the ground for exploration or development work, not to make acquisitions, not to increase shareholder and stakeholder value, but to keep the lights on and to keep the gas in their BMWs or whatever it is to fund their lifestyle.
Traditionally, those private placements have a four-month hold time, after which they can sell their shares. So if they do a raise in January, in May they can sell their shares four months later. And I was a newsletter writer that could tell people to buy stock and was figuring out almost by reverse engineering and then by making friends with some smarter people than me, that these companies were using me to create liquidity to sell their private placement shares when they became free trading.
That's one side of investing privately. So, I started to figure that out, but the average-Joe investor I don't think is going to figure that out.
How to Get Started With Private Investments?
And then the other part is how do you start doing private investments?
Just as a function of being a newsletter writer, some eight or 10 years ago now, I had a colleague of mine offer me a private placement and he was saying, "This is a good silver company. It has quite a good asset. I think this is going to be a good speculation. It's a good group of guys that I’ve known for a while. You should participate.”
And I was thinking to myself, "Well, I don't even know how to do that." So, I guess I had to rely on my network to ask people, "Okay. Well, what does that entail?" Well, you have to fill out the subscription agreement. Okay, well, then what? Well, you get the share certificate, either a physical certificate, which still exist, or you get the DRS, the Direct Registration Statement, which is hosted by some transfer agent, typically Computershare or there's a couple others around.
And you've got to get those shares deposited, get the legend removed because they’re exempt securities, they're restricted. And a lot goes into that. So, I had to learn all that through my network, get the accounts set up, et cetera.
But back to your point about checking the box for being an accredited investor. Which one of the reasons makes you eligible to participate? Do you make this much money? Do you have this many assets? Do you run a trust? There's a bunch of reasons. It looks like this:
Example of an Accredited Investor Questionnaire
Do you satisfy one or more of the categories indicated below (check appropriate box):
1A. A bank as defined in section 3(a)(2) of the U.S. Securities Act, or a savings and loan association or other institution as defined in section 3(a)(5)(A) of the U.S. Securities Act whether acting in its individual or a fiduciary capacity.
1B. A broker or dealer registered pursuant to section 15 of the United States Securities Exchange Act of 1934, as amended.
1C. An investment adviser registered pursuant to section 203 of the United States Investment Advisers Act of 1940 or registered pursuant to the laws of a state.
1D. An investment adviser relying on the exemption from registering with the United States Securities and Exchange Commission under section 203(l) or (m) of the United States Investment Advisers Act of 1940.
1E. An insurance company as defined in section 2(a)(13) of the U.S. Securities Act.
1F. An investment company registered under the United States Investment Company Act of 1940 or a business development company as defined in section 2(a)(48) of that Act.
1G. A Small Business Investment Company licensed by the U.S. Small Business Administration under section 301(c) or (d) of the United States Small Business Investment Act of 1958.
1H. A Rural Business Investment Company as defined in section 384A of the United States Consolidated Farm and Rural Development Act.
1I. A plan established and maintained by a state, its political divisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees with total assets in excess of US$ 5,000,000.
1J. An employee benefit plan within the meaning of the United States Employee Retirement Income Security Act of 1974, if the investment decision is made by a plan fiduciary, as defined in section 3(21) of such Act, which is either a bank, savings and loan association, insurance company or registered investment adviser, or if the employee benefit plan has total assets in excess of US$ 5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors.
2. A private business development company as defined in section 202(a)(22) of the United States Investment Advisors Act of 1940.
3. A corporation, an organization described in section 501(c)(3) of the United States Internal Revenue Code, or a Massachusetts or similar business trust, partnership, or limited liability company, not formed for the specific purpose of acquiring the Units, with total assets in excess of US$ 5,000,000.
4. A director or executive officer of the Issuer (including an Individual Retirement Account (“IRA”) owned by any of such persons).
5. A natural person (including an IRA owned by such person) whose individual net worth (excluding their primary residence), or joint net worth with that person’s spouse or spousal equivalent (which assets need not be held jointly), exceeds US$ 1,000,000 (indebtedness secured by the primary residence, up to the estimated fair market value of the primary residence at the date hereof, shall not be included as a liability and if the amount of such indebtedness outstanding at the date hereof exceeds the amount outstanding 60 days before the date hereof, other than as a result of the acquisition of the primary residence, the amount of such excess shall be included as a liability).
6. A natural person (including an IRA owned by such person) who had an individual income in excess of US$ 200,000 in each of the two most recent years or joint income with that person’s spouse or spousal equivalent in excess of US$ 300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year.
7A. A trust with total assets in excess of US$ 5,000,000 not formed for the specific purpose of acquiring the Units, and whose purchase is directed by a person who has such knowledge and experience in financial and business matters that they are capable of evaluating the merits and risks of an investment in the Units.
7B. A revocable trust which may be revoked or amended by its settlors (creators), each of whom is an Accredited Investor.
8. An entity in which all of the equity owners are Accredited Investors. [Note: each of the equity owners owning more than 10% of the entity must complete a copy of this Confirmation.]
9. An entity, of a type not listed in Categories (1), (2), (3), (7A or B), or (8), not formed for the specific purpose of acquiring the Units, owning investments in excess of US$ 5,000,000.
10. A natural person holding in good standing one or more professional certifications or designations or credentials from an accredited educational institution that the United States Securities and Exchange Commission has designated as qualifying an individual for accredited investor status.
11. A natural person who is a knowledgeable employee, as defined in rule 3c-5(a)(4) under the United States Investment Company Act of 1940, of the Issuer where the Issuer would be an investment company, as defined in section 3 of such Act, but for the exclusions provided by section 3(c)(1) or (7) of such Act.
12. A family office, as defined in rule 202(a)(11)(G)-1 under the United States Investment Advisers Act of 1940, with assets under management in excess of US$ 5,000,000, not formed for the purpose of acquiring the Units, whose investment is directed by a person with such knowledge and experience in financial and business matters that such family office is capable of evaluating the merits and risks of the investment.
13. A family client, as defined in rule 202(a)(11)(G)–1 under the United States Investment Advisers Act of 1940, of a family office meeting the requirements in Category 12 and whose investment in the Issuer is directed by a person with such knowledge and experience in financial and business matters that such family office is capable of evaluating the merits and risks of the investment.
And the onus is essentially on you. I mean, this isn't a list or a document that's checked by third parties. You see it and the company that you're investing in sees it.
So, at the risk of getting hauled off to jail, when I was doing my first private placements, I was checking the box, right? I may or may not have met the requirements for the box that I was checking, but you have to get your foot in the door somehow. That's my initial story. And then once you've done it a couple of times, then it becomes almost second nature.
When you do a private placement, you’ll fill out what are called Subscription Documents. It's a ~50-page document. I know what pages to sign, I know where I have to check. And then I send the documents and the funds to the company I’m investing in, and they send me or my broker the shares to deposit in my account.
But anyway, if you were talking to someone about one of your Junior Resource Monthly readers, for example, how would you explain it to them? How and why should they be doing private placements?
Why You Should Be Doing Private Placements
Gerardo Del Real: I recall my very first private placement, reading through the requirements and going, “Well, technically speaking, I'm not making the amount of money that's required to do this, but I do have enough equity in real estate where if I wanted to, I could.” And so, that's a long way of explaining to you that sometimes you gotta get creative with the technicalities on things. Never do anything illegal, always consult your attorney. But there are different ways to measure liquidity and those agreements specify what you can and can't use. There are multiple ways to meet that threshold. How I would explain it to someone that subscribes to Junior Resource Monthly, which is a monthly service that charges $199 year and then takes a mid- to long-term view on megatrends and ways to leverage those megatrends in your favor by owning resource stocks?
I would say every public or private company during the course of its life will issue shares in exchange for dollars. So you, as the shareholder, if you have the network, if you have the access, if you have the contacts, can reach out to said company and say, "I really like the potential here. I understand the risk. I'm willing to sign off on understanding the risk, and this is how much of my risk capital I'm willing to allocate to help fund the plans for the company that I think has potential." And if you're right and you get that right and the company does well by you, then you not only get the benefit of being able to get favorable treatments on the share price usually, but you also get the bonus of either a half a warrant or a full warrant, which gives you the right, but not the obligation, to buy another share at a fixed price.
Now let me provide some context on why it's so valuable. When we financed Patriot Battery Metals initially in ,Junior Resource Insider and I wrote a pretty significant check, it not only was a 16-cent financing, it came with a full warrant. That means for every share I bought, I got the right to buy another share at a fixed price of 25-cents. And that was good for two years. And I think by the time I exercised those warrants. The stock was somewhere in the $3 or $4 range. I have quite a few 75-cent warrants that I can also exercise.
That initial investment in Patriot has generated a life-changing return for me. But man, you compound that with the ability to buy an equal amount of shares at 25- and 75-cents and you get that fixed price for years… You just simply can't find that with other risk asset classes. You can't buy a bar of gold and simultaneously get an offer, a lottery ticket in essence, to be able to buy another bar of gold in two or three years at the same price or at a fixed price. Warrants are something that's really unique with private placements. It provides you a better shot at the speculation working out for you.
And then the rest of it is just really, you have to check the boxes. What are you looking for? What's your risk timeline? Are you willing to lose all your money? Is the trend your friend? Are you willing to be a contrarian? Can you handle the volatility? I mean, all of these things. So many of my positions, including Patriot, were down 50% at one time. Now it's a +10,000% gain for me.
So that's my personal story. That's how I would explain it. We, the check writers, become the funding vehicle for said company to go and execute on its business model.
And hopefully, if the business model is executed correctly and Mother Nature and geology are kind to us, then we not only get the benefit of a higher share price that we can sell whenever we're ready to sell and take profits, but we also get that luxury of being able to buy another share at a predetermined price for a fixed amount of time.
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Are There Different Kinds of Private Investments?
Nick Hodge: You mentioned if the geology cooperates, and we tend to do primarily mining deals. We should explain that for a second.
Early state mining companies aren't generating cash flows. They have to explore, they have to acquire properties, they have to drill, and then they have to permit. And all of that requires capital, which they don't have because they're not selling anything. All these junior mining companies need funding. So they all do private placements. That's not to say other industries don't do private placements, but other industries are different in that they could potentially be generating revenue from an early stage. And so, two things I wanted to discuss.
One is, there's all sorts of different classes of private deals now. Lots of investors were seeing how well you can do in a private placement. And then there were also some changes in legislation. There was the JOBS Act that allowed crowdfunding deals where you didn't have to be accredited. And then lots of companies started raising money that way, because you could raise it from anybody. But if you could raise it from anybody, is it really a private deal? Is it really a private placement? Or is it just a different way to sell shares? For me, it's the latter, and I haven't done too many of those deals and I've seen some that stayed private, right? You can raise money privately and then they don't go public. And then there's no way to get your capital out other than to sell your shares to another prospective private shareholder.
And then the other thing was how early do you like to be? And I'll answer first. I mean, you want to be in as early as possible is the easy answer. Potentially, when they're private ahead of a go-public round or early stage when they still have a tight share structure or have recently rolled it back and have a low valuation relative to you to what you think they could accomplish based on the plan that they tell you they're going to execute with the capital that you're giving them. Those are the types of deals that I like to be in. Again, there's lifestyle companies that have been around for a decade or longer and they're funding themselves all the time, but you end up getting diluted out if you stick with them for too long because they are fundraising all the time, or you end up getting rolled back where they do a share consolidation, and you have many fewer shares than you had before they had to consolidate. So, any thoughts on that stuff?
Gerardo Del Real: I think you did a great job outlining the fact that there's a risk to everything. And some of those risks are important to highlight. Look, I have four share certificates of a private company or private companies that were supposed to be public a year and a half or two ago, and either the commodity price didn't cooperate or the asset that was going to be the qualifying asset to take it public didn't work out or simply they just don't feel it's time to go to market. My capital is stuck in that safe. It's stuck in a box. And so, that's one of the risks, and you mentioned that. So, it's important to always start with your checklist of the risk you're willing to take.
And some of those risks include getting your capital tied up. Another risk is, well, it does go public, but the market turns and now you're not in the right sector or you're not riding the right trend because you waited too long. And now you have maybe half of your money's gone or at least half of your money's disappeared for the time being until the company rights that ship. That's possible. And look, sometimes you can have a hot trend, you can have great management and sometimes you go look and it’s simply not there. That happens more often than not. And so, I think it all goes back to how we were taught, Nick, the importance of share structure. A good solid, tight share structure will forgive mistakes and will forgive the geology not cooperating with you, right?
If you have a company that you're writing a check for and the share structure is already blown up, in loose hands, not with the right people, you're not going to be able to afford a mistake or misses, whether they're geological or jurisdictional.
I think we're in a very fertile environment for profits this year. I think as great as last year was, this year has so much to offer as well. And I think it's going to be more widespread. I mean, you and I financed a lithium deal here recently at 10-cents, and we wrote another check a few weeks later at 50-cents. And the stock has already hit $1.05 — all within a month and a half. That's a hot trend. I suspect it's going to do really well. I think this company's going to be a $3 to $5 company by year-end.
This is my last point: When you have what you think is a good private deal in front of you, you want to bet enough to make account if you're right.
Nick Hodge: Yes. That's a good point.
Gerardo Del Real: ...Because it's risky enough allocating capital in these small deals. The last thing you want is to have a big win percentage-wise, but maybe dollar-wise it's not significant to you because then what's the point, folks? I mean, it's fun to play the game. I'm competitive. I love boxing, I love sports, but I want to win, and I don't want to win in percentage gains. I want those percentage gains to be accompanied by dollar gains.
And that for me is something that, as I mature as a speculator, as I mature as a private investor, I'm being very hyper focused on. And it's why with my private placement service, Junior Resource Insider, I've gotten really selective in the last few months. I want to make sure these deals are vetted properly. I want to make sure I'm checking all those boxes and I want to make sure they have the potential for scale and that they allow my subscribers and myself the opportunity for a miss and possibly two misses, so that we give ourselves enough time in the right cycle to come back from that. That’s how we’re going to find our next Patriot Battery Metals.
If you want access to the private placements we personally vet and participate in, consider joining us at Junior Resource Insider or Hodge Family Office Private Intel.
If you have additional questions about private placements, feel free to call our customer service team at 844-334-4700 or email at email@example.com, and we’ll happily answer them.
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