Investing in Private Stock Through Your Self-Directed IRA
Private stock or private placements as they are sometimes called, are an asset class with many possibilities. When a new company launches it often requires excess capital when experiencing stages of growth. Prior to going public, they may issue private stock in order to attract investors. A savvy investor looking to spend retirement account dollars on a private company may do so with a self-directed IRA.
Self-directed IRAs are allowed to acquire ownership interest in private companies offering equity in exchange for capital. It also opens doors to perform the necessary due diligence prior to investing.
IRAs may invest in non-publicly traded stock from corporations, LLCs, hedge funds, or limited partnerships. The only company an IRA cannot own shares of are S Corporations.
Advantages of Investing in Private Companies Through Your Self-Directed IRA
The IRA owns the private stock. All stock certificates and equity are owned by the IRA, and it receives all rights and responsibilities. All paperwork is filed in the name of the IRA and IRA Services is listed as the trust company.
A redistribution of authority may help investors avoid prohibited transactions. Self-dealing prohibited transactions can be avoided by establishing boards or committees of non-disqualified persons.
The IRA may qualify as an accredited investor. Regulation D investments are sometimes only available to accredited investors, as established in accordance with the US Securities and Exchange Commission. If you qualify as an accredited investor, your IRA may qualify too.
Types of Private Placements
Individual Retirement accounts may be used to invest in several different types of private placements. IRA Services handles everything from small enterprise to billion dollar private equity investments.
Private placement investments include:
Start-ups
LLCs
LPs
Hedge Funds
PPMs
Private Equity
Equity Crowdfunding
REITS
Exchange Traded Funds
Convertible Notes
Private equity can be acquired through a fund or, in some instances, the investment is made directly into a company including that of a current employer.
When considering private placements as a potential IRA investment, keep the prohibited transaction rules in mind. If you or a disqualified person owns 50% or more of a privately held company, investing may be considered a prohibited transaction.
If you have questions about prohibited transactions, you can find more information here.
David meets a new startup company at a solar energy conference he attends in California. The company is working on putting photovoltaic panels on houses throughout the northern region. David thinks there is a big possibility the company will expand throughout California and beyond.
He decides to invest in the solar company during their first round of fundraising. In return, David gets equity in the new solar energy company. He logs onto IRA Services client portal and downloads all the necessary authorization documents so that he can use his self-directed IRA to invest.
Private Placements and The Securities and Exchange Commission
Certain investments require a SEC notice filing that the US Securities and Exchange Commission has put in place to ensure a company offering is in compliance with securities laws. There are certain requirements an individual investor must meet in order to invest in private companies that require a SEC notice filing.
Requirements for an accredited investor include but are not limited to:
Annual income of over $200,000 for the past 2 years if single, or $300,000 if married
Net worth in excess of $1M single or married, excluding equity in private residence or assets attached to it
Before you invest, it is important to obtain all the information that you need to make an informed investment decision. We are ready when you are.
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