Katusa’s Quick Guide

to Investing in
Private Placements
A Special Report for Katusa Research Subscribers

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“Private placement.”
These two words are almost never mentioned in investment how-to
guides.
You never hear them mentioned on financial television.
In fact, not one investor in 10,000 knows what a “private placement”
is.
Yet the term “private placement” is cherished by many of the world’s
greatest investors.
Private placements are one of the true insider secrets of the
financial world. They offer the opportunity to make 10, 20, even 50
times your money in a single stock. A private placement can turn a
modest investment of $25,000 into $500,000.
If you’ve ever suspected that rich, connected people get access to
privileged investment deals that “regular” folks do not, your
suspicions are correct.
Rich, connected people do get perks, privileges, and advantages in
the investment market.
These often come in the form of “private placements.”
I’ve personally made millions of dollars in private placement
deals…and I have millions more invested in them right now. They
are a core component of my investment strategy.
But even small investors can hit it BIG in private placements.
About seven years ago, I encouraged a friend of mine to invest
$4,800 in one of the best private placement opportunities I’d ever
seen. She made over $150,000 on the deal…enough to pay for her
entire MBA…and then some.
Because private placements are one of the greatest wealth creation
vehicles in the financial markets, I’ve written this short guide to
explain them. I’ll cover why they exist, how they work, and how you
can personally benefit from them.
If you’re an old hand at private placements, you’ll find this a fun
refresher course. If you’re new to private placements,
congratulations.
You’re about to acquire a very useful and very powerful set of
financial skills…one that could make you hundreds of thousands–
even millions–of dollars.

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Why Top Investors Love “Private

Placement” Deals
When natural resource firms need to raise money to do things like
drill for oil or develop gold mines, they often do it through “private
placements.”
A private placement allows a company to sell shares to investors
outside of the normal stock market.
In a private placement, companies typically offer shares at a discount
to the current market value. This discount is often in the 5% - 25%
range. The price of shares and the dollar amount raised are
negotiated in advance.
For large investors, negotiating the price and the amount invested in
advance is a huge positive. It means they can acquire large blocks of
shares without dealing with the market’s day-to-day fluctuations. It
means the share price can’t “run away” and shoot 25% - 50% higher
while the position is being acquired.
Being able to acquire a large number of shares in a company at a set,
discounted price is enough to make private placements a very
attractive investment vehicle for large investors.
But there is another component of private placements that makes
them even better–it’s the icing on the cake.
A private placement offering can also include a stock option
component, which are called “warrants.”
Warrants act like stock options in that they allow investors to buy a
stock at a predetermined price in the future. They have finite life
spans. Some warrants expire in one year. Some expire in 2, 3, even 5
years.
And just like stock options, warrants can soar hundreds of percent in
value when a company does well.
For example, a company doing a private placement at $0.50 per
share could include a warrant with each share that would allow
investors to buy additional stock for $1 per share at any time in the
next three years.
If the company does not find success and the share price does not
climb to $1 within three years, the warrants expire worthless.
But if the company does find success and its share price climbs to $4
per share, the investor can “exercise” his warrants and buy stock for
$1 per share and then sell it for $4 per share.

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This would net him a $3 per share profit, which is a 300% gain on
the warrant exercise price…and a 500% gain on the original capital
invested.
The profit on the warrant is in addition to the profit made on the
stock investment. In this case, the investor enjoys a $3.50 per share
profit ($4 minus $0.50), or a 600% gain. Thus the buyer would gain
a total of 1,100%.
The gain in the stock is great, but the warrant made the investment,
much, much more profitable.
That’s the power of a warrant…and it’s why they are such an
attractive component of private placements. In fact, it’s a rare, rare
case that I will invest a private placement that does not include
warrants.
As I mentioned, a modest $25,000 can grow into $500,000 when a
resource firm achieves success and you own warrants along with
stock.

Because you can buy stock at a discount AND get a warrant in a

private placement, these deals are in high demand with wealthy
individual investors and large institutional investors.
This demand makes private placements a good way for companies to
raise large amounts of money quickly and easily from the best
investors in the business.

Why Most People Don’t Know About Private

Placements
Private placements are powerful financial vehicles.

However, because these deals do not take place on a regular stock

exchange, you cannot look up their prices on websites like Yahoo
Finance.
Also, the money involved in a private placement is often tiny
compared to the money involved in a big-name IPO like Tesla
Motors.
For example, many private placements in the resource sector raise
$5 - $25 million. This is less than 1% of a heavily-publicized tech IPO
that raises a billion dollars.
That’s why you’ll never see these deals featured on the front page of
the Wall Street Journal. It’s why people on mainstream financial
television never talk about them.

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This lack of mainstream popularity turns many folks off.

They simply aren’t comfortable with investments that aren’t
splashed over mainstream magazine covers.
But if you’re like me, you realize this is a GREAT thing.

If you’re like me, you realize investing alongside the masses is a sure
way to lose money…while paying very high fees to brokers and
bankers.
I love the fact that private placements are a small and uncovered
area of the market.
This means there aren’t millions of investors reading the same news
stories and piling into these deals.
It means these deals are off the radar of billion-dollar investment
funds.
Said another way, it means private placements are
extraordinary opportunities for the small group of
investors who are willing to do the necessary legwork and
research to understand them.
Having said all that, investing in private placements isn’t easy.
You can’t simply run conventional “stock screens” to uncover
winning private placement opportunities.
The companies that offer great private placement opportunities
typically don’t have conventional “earnings” that investors want to
see. Some of them don’t make any profit at all.
This is why “cookie cutter” approaches used by thousands of mutual
funds and newsletter writers DO NOT WORK in the private
placement world.

To get in on the best deals, you have to know all the major players in
Vancouver, the heart of global resource finance.
You have to know the bankers, brokers, CEOs, and entrepreneurs.
You have to visit the projects.
You have to constantly take the pulse of the market and know about
all the deals being lined up. Keeping track of it all is a full-time job.
That’s why I’m so excited to share my best ideas with intelligent
individual investors.
I spend long hours in my office, which is located in downtown
Vancouver. I hear hundreds of “deal pitches” every year.

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In the past 10 years I’ve flown over one million miles to visit
hundreds of resource projects in person. I network constantly with
some of the world’s most influential CEOs and financiers.
It’s a lot of work…but it is absolutely necessary for achieving success
in private placements.

All this work is why I’m now one of the top financiers in
Vancouver…it’s why I’m able to share great private placement deals
with Katusa Research readers.

More Key Private Placement

Information
In the sections above, I covered the key basics of private placements.
This section provides a handful of other key points you need to know
in order to achieve private placement success.
KEY POINT #1: Because the public information you can get on a
private placement is a lot less than the information you can get on
say, Microsoft shares, and because private placements are riskier
than some other investments, the government restricts participation
in them to “accredited investors.”
An accredited investor is someone who can demonstrate an annual
income that exceeded $200,000 (or $300,000 with a spouse) for the
last two years and can reasonably expect to achieve the same income
for the current year.
One can also be considered an accredited investor by having a net
worth of more than $1 million.
The government restricts access to private placement deals to
accredited investors because it figures rich people are more
knowledgeable about finance, more comfortable with riskier
investments, and better able to handle investment losses than most
folks.

You may disagree with the government’s position.

Personally, I’ve seen rich people make horrible investment decisions
and I’ve seen people with less money make great investment
decisions.

But I don’t make the rules. I just play by them.

As part of the private placement paperwork, an investor must sign a
document that states he/she is accredited.
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KEY POINT #2: There are two kinds of private placements.

One, the “brokered” kind.
And two, the “non-brokered” kind.
In a brokered private placement, a brokerage house acts as a
middleman between the company and investors. The broker raises
the money from clients and directs it to the company. The broker
receives a commission in the 6% to 10% range for performing this
service.
This usually happens when it’s a large financial raise or when a
junior needs the help of a broker to drum up interest.
Some brokers have large client bases who like to participate in
private placements. Getting access to a large base of investors can
make it attractive for a company to go down the brokered financing
route.
The management teams who have large followings themselves can go
down the “non-brokered” financing route and cut out the middleman
(broker) to save on finance costs. In a non-brokered private
placement, the investors place their money directly with the
company. This saves a lot of money on fees for the company.
Non-brokered financings are typically done by companies with
access to good contacts and networks. They have “reach,” so they
don’t need to pay a broker.
I prefer to participate in non-brokered financings. Cutting out the
middleman means more money goes to the company.
KEY POINT #3: Investors in private placements may face what is
called a “lock up” period. This is a four-month window when the
investors are not allowed to sell their shares. There are situations
upon mergers and short-form prospectuses in which there are no
four-month trade restrictions, but for most junior private
placements there is a lock up period.
Lock up periods ensure private placement investors hold their stock
for a period of time and do not “flip it” for instant profits. This rule
somewhat promotes longer holding periods.
I have no problem with lock up periods. I invest in private placement
deals where I like the long-term prospects of the company. But the
lock up period is something every investor should be aware of.
KEY POINT #4: Investing through a private placement is not a
guarantee of success. Investing in a company through a private
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placement carries the same downside risks as investing in it through

conventional means.
In order for me to participate in its private placement, a company
has to meet all the same rigorous requirements I have for every other
investment. It must be piloted by skilled managers who own
substantial amounts of company stock (skin in the game). It has to
have the right financial structure. It has to be operating in the right
places in the world. It has to be a good value.
I’ve written extensively on my investment requirements in my short
book Resource Market Millionaire. Remember, this book acts as an
“Owner’s Manual” for Katusa’s Resource Opportunities. You can
access it in the Members Area.

How to Participate in Private Placements

If you’re new to private placement investing, it can be intimidating.

But it’s actually pretty easy.
If you’ve ever applied for a bank account or a brokerage account,
participating in a private placement will be a piece of cake.
Here are the basics…and how to participate in the JDL Gold private
placement:

Step 1: Determine if you are an accredited investor. If you are, go

to Step 2. If you are not: you can still look to buy shares in
the company close to the private placement price in the
market.
Step 2: Read all the information provided and determine if you
want to participate in the private placement.
Step 3: Decide how much money you want to allocate to the private
placement. The financing will be in Canadian currency. You
will have to determine that number in Canadian dollars.
Also, you will only be allowed to wire the company in
Canadian dollars.
Step 4: Contact the number provided in the special alert given to
Katusa Research subscribers.
Step 5: When a company representative answers the call, follow
these steps:
1. Tell them you are a Katusa Research subscriber.
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2. They will ask for you name. You will give them your full
name.
3. You will then state you desired allocation in Canadian
dollars.
4. You will state your phone number.
5. You will state your email address.
6. You will state your full address.
7. The company representative will confirm all your
information and will contact you again within 3
business days with the subscription forms.

The most important step is next:

Step 6: When you receive the subscription forms, you may feel
intimidated. Don’t. They are mainly created by lawyers that
over-complicate matters as per request from the regulators.
It is what it is. We don’t make the rules. We just play by
them.
You will receive an email from the company representative
within three business days of your conversation. The email
will have an attachment.
You need to open the attachment and print the full
document.
Then you need to fill out the full subscription forms.
If you have any questions while filling out the document,
call the management back at the number provided and
they will walk you through the process.
Step 7: Scan the document and email it back to the company
representative.
Step 8: There will be wire instructions attached. You will need to go
to the bank and wire the funds.
Make sure your full name is on the wire. The note should be
for the private placement of the company name. For
example, if the private placement is for Rule Exploration
Corp, then you will want the full name of the specific
company you are buying in the private placement in the
memo (e.g., “PP for Rule Exploration Corp”).
Step 9: You then will have to mail in the physical subscription
forms that you have filled out and have already emailed a
scanned copy of to the company representative.

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Step 10: Within 45 business days, you will receive a share certificate
and warrant certificate. You will send all those documents
to your broker and put the shares and warrants in your
brokerage account.
Step 11: Congratulate yourself. You just participated in a private
placement with some of the best resource investors in the
world.

The Basics of Warrants

When a company raises money in a private placement, it issues a
“unit,” which consists of a share and a warrant.
You know the basics of “shares.” They are ownership stakes in
businesses. This section will cover the second part of private
placement financings: warrants.
Like many financial vehicles, warrants have some “moving parts”
you need to understand in order to use them properly.
Remember, a warrant is a contract that gives the holder the right–
but not the obligation–to buy a stock at a predetermined price by
a predetermined time in the future. There are many different
types of warrants.
For example, a warrant might grant its owner the right, but not
the obligation, to buy a stock at $2 per share at any time during
the next two years. Or, a warrant might grant its owner the right,
but not the obligation, to buy a stock at $1 per share during the
next five years.
Strike Price: Lower is Better
The first aspect of a warrant you need to know about is the “strike
price.” This is the price at which you can buy the stock at some
point in the future.
If a warrant has a strike price of $2, that means you will be able to
buy company stock at $2 at some point in the future.
In the case of a warrant with a strike price of $2, if a resource
company is trading for $1 per share, the warrant has no intrinsic
value. But if the company achieves major success and sees its
stock price soar to $6, the warrant will have an intrinsic value of
$4, since it allows you to buy the stock for $2 per share, which you
could then sell for $6 per share (6 - 2 = 4).
When the share price of a stock is trading above the warrant’s
strike price, we say the warrant is “in the money.” When the share

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price of a stock is trading below the warrant’s strike price, we say

it is “out of the money.”
Expiration Date: Longer is Better

The second aspect of a warrant you need to know about is the

“expiration date.” This is the date at which the contract expires.
After the contract expires, neither the company nor the holder has
any rights or obligations that were associated with the warrants. If
a warrant expires “out of the money,” it is worthless.
The further out the expiration date is in the future, the more time
a company has to achieve success and a higher share price, and
the more the warrant will be worth.
In other words, all things being equal, a “3-year” warrant is worth
more than a “1-year” warrant…and a “5-year” warrant is worth
more than a “3-year” warrant.
Most warrants issued in private placements have expiration dates
1 – 5 years in the future.
It’s rare that more valuable “5-year” warrants are issued by
companies.

Conversion Ratio: More is Better

The conversion ratio of a warrant is the number of shares
applicable to the warrant.

Some warrants are good for one-quarter of a share, which is

known as a quarter warrant. This means you need four warrants to
buy one share.
Some warrants are good for one-half of a share (you need two
warrants for one share). These are called “half warrants.”
Some warrants are good for a full share (you need one warrant for
one share). These are called “full warrants.”
Obviously, a full warrant is better than half a warrant. You want
warrants that can convert into as many shares as possible.
With all this in mind, the best warrant “sweeteners” for private
placement investors will have:
-Lower, rather than higher, strike prices. This makes the
warrants more likely to go or expire “in the money” and have
intrinsic value. If I participate in a private placement at say, $0.50

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per share, I’d rather get warrants with a strike price of $1 instead
of $2.
-Longer, rather than shorter, expiration dates. This gives
the company more time to achieve success and a higher share
price…which gives the warrants more time to go or expire “in the
money” and have intrinsic value. I’d rather get 3-year warrants
than 1-year warrants. I’d rather get 5-year warrants than 3-year
warrants.
-Higher, rather than lower, conversion ratios. You want
warrants that convert into as much stock as possible. This is why I
prefer full warrants.

Freely Tradable Vs. Non-Tradable

Some warrants trade freely on stock exchanges. You can buy and sell them
on the open market. Some warrants are not freely tradable. You cannot buy
or sell them on an exchange.
Freely tradable warrants are much better than non-tradable
warrants for both investors and the company. Freely tradable
warrants are better for the investor because they trade freely, and
there is a real bid-ask market for the warrants. Free trading shares
are also much better for the company issuing the warrants. It
expands its base of investors. This is because many fund managers
are prohibited from buying stocks under $1 per share (sub $1
stocks are seen as riskier). However, the same fund managers are
allowed to buy warrants. Those managers can buy the warrants
and become investors in the company.
Whether or not a warrant is freely tradable depends on whether it
is listed or not. In a company’s news release, it will mention
something like, “The warrants are listed on the TSX Venture
Exchange under the trading symbol XYZ.WT.TO.”
A freely tradable warrant will have “.WT” in its symbol.

Ideally, we get warrants that are freely tradable. It’s good to be

able to sell the warrants on the open market whenever you like.
But you do not have the obligation to sell or exercise the warrants
when they are listed. It’s just an extra option for the investor.
The other advantage of a freely tradable (or listed) warrant is that
it doesn’t have to be above the strike price to be able to realize a
profit.
When a non-tradable warrant has a strike price of $1.00 but the
stock is at $0.75, you wouldn’t want to exercise the warrant. It’s
not in the money.
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In this situation, a freely tradable warrant still has value. If you

wanted to, you could sell the warrant on the exchange. You
couldn’t do this with a non-tradable warrant.
The best type of warrant is a free-trading, full 5-year warrant
with a strike price that is 50% higher than the share price at
the time of financing. My friend Rick Rule calls this kind of
warrant the “Katusa Warrant”, because I’ve been a catalyst for
creating them.
You could think of free-trading, full 5-year warrants as
the “Ferrari” of warrants.

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