If you are new to speculative investing, you might want to read ‘Investing Basics’ under ‘Investing’ as part of our the website’s ‘Money’ tab.
Speculative investing is based on the willingness to accept high risks in the hope of significant financial gain.
Theoretically, the return on investment is a trade-off with the risk associated with an investment. In reality, government interferes with access to investment opportunities and media does not provide for equal dispersion of information to investors. Speculative investing favours those that have developed a network to access the opportunities and information about the opportunities (including the management behind the venture) and are considered sophisticated investors, sometimes referred to as qualified investors.
When an early-stage company needs capital for growth, it often does not meet bank requirements for debt financing and the cost of attracting a single investor may put them into a negotiating disadvantage. If you doubt this, you should view some episodes of CBC’s “Dragon’s Den”. Yet, if they offer to sell shares to the general public without the proper regulatory paperwork, fees and approvals the company’s management can end up in jail. Obtaining regulatory approval is costly and many companies don’t have the money available in order to raise the money.
So, where do companies turn to? Private placements are a form of investing available only to ‘qualified’ investors that meet regulatory body definitions. These placements are usually restricted to less than 50 investors. However, private placements are not allowed to be promoted to the public, so management only offers the opportunity to their friends and contacts. Yet, private placements provide some of the best returns available. Companies have been known to move from less than $0.10 a share to over $10 a share after they trade on the open market even within 2 years of the initial investment. It is not unusual to hear about a ten-fold, twenty-fold or even thirty-fold return on investment.
A large part of the appreciation in the value of the investment is because the money from private placement is used to reduce or eliminate some of the risks associated with the venture. For example, in gold exploration the money may be used to drill some holes to see if, or how much and how good the gold in the ground is. A prospector may find some visible gold but doesn’t know how much there is (how deep it goes) and if it is commercially viable. Therefore he/she has to raise money to do that work. With as little as $2 million a company may find that it has indication of as much as 3 million ounces of gold. At $1,500 an ounce, you’re looking at about $4.5 billion in gold. Ofcourse more money will have to be raised to bring the property into production and may take a few years, leaving a net profit of maybe half that amount. The point is that since so much risk is removed from the property with private placement money, it is those individuals that can get the greatest returns.
If you’re interested in finding out about these opportunities, you might want to network with some MetroActive members who are in the exploration industry because they have the contacts and information about this. The April 13th networking event at The Exchange Tower had almost 100 members attend and several of them were well-known investment bankers and mining industry professionals.