The Perfect Broker for Private Placements
Why nothing can beat a traditional, face-to-face broker relationship
As a modern investor, I often wonder why I should pay a traditional broker a 1% commission on every trade when I can execute transactions faster—and sometimes better—myself. Plus, with the lackluster reporting that leaves me scrambling at tax time, the appeal of online brokers that streamline everything with a click is undeniable.
However, when it comes to private placements, I strongly favor the 1980s-style personal broker relationship. Here's why.
Private Placements: Not an Automated Process
Buying 100 shares of AAPL or writing a covered call in my dividend portfolio are straightforward transactions, typically executed without human involvement. Calling a broker only complicates things—like the time I wanted to trade a Nasdaq stock in the early pre-market, but my broker was still en route to the office.
Private placements, however, are far from automated. In non-brokered private placements, you might deal with someone at the company managing orders on an Excel sheet. If the placement is oversubscribed, this person decides who gets in or gets cut back.
Once your order is (partially) accepted, you need to fill out a subscription agreement (the "sub") and send it to the company or your broker. Then, the subscribed amount must be wired to the company before closing.
Clearly, private placement transactions are complex and involve a lot of manual work.
A Good Broker Will Handle the Heavy Lifting
This is where a traditional broker can add value. While he's busy pitching his latest pick and practicing his putting skills, his assistant will complete the subscription agreement for you. You only need to sign the pages and email them back.
You also won't have to worry about sending funds on time. Your broker's back office will coordinate with the company raising money (or their brokerage house, if it's a brokered placement) to ensure the funds arrive before closing.
Beware of Exercising Warrants on Your Own
Even after the private placement, having a personal broker can be beneficial. As you might remember from my article on warrants, placements often come as a unit: one share plus one-half or a full warrant.
You can exercise these warrants directly with the company, but be warned: it's an administrative nightmare and you might end up losing money.
Here's the process for exercising warrants directly with a company:
You sign the notice of exercise on the warrant certificates and mail it to the company.
The company confirms the exercise, and you wire the funds for the exercised warrants.
Once the company receives the funds, they issue an electronic stock certificate (DRS) and mail it to you.
You then contact your brokerage house to have the shares booked into your account, which can take several days.
Expect this process to take 1-2 weeks. During this time, the stock price fluctuates. If the stock price drops below your exercise price, you could end up with a loss when the shares finally arrive in your account.
Let Your Broker Handle It for You
A much better alternative is to let your golf-playing broker handle it. Thanks to his diligent back office, you can do a cashless exercise of your warrants and sell on the same day you decide to exercise. This eliminates your capital requirements and stock price risk.
How Does This Work?
Your broker can exercise warrants faster than you. More importantly, he can sell the shares before you actually have them. Because of the warrants, neither your broker nor you are at risk if the price goes up. By selling your shares first, you lock in your sale price and generate the capital before exercising your warrants.
The cashless and instant exercise option is probably the most valuable feature a traditional broker can offer. If you plan to participate in private placements long-term, finding such a broker should be your first step.
Choosing the Right Broker
I can't tell you who the best broker is for you, but since private placements are primarily done by Canadian or US companies, look for a brokerage with suitable infrastructure. Here are a few names to consider:
Each of these firms works with various investment advisors. Contact them and find the best fit for you. Some advisors understand what you need and will leave you alone afterward. Others might be like car salesmen, constantly pitching hot stories. If that's the case, politely decline and choose another advisor.
After over 10 years of participating in private placements, I have many examples where I would have made less money—or even incurred losses—without my traditional investment advisor. So, I don't mind him playing golf, as long as his back office is diligent and his traders are capable.