Self-Directed IRAs and Crowdfunding Private Placements
Want to break free of the ho-hum returns currently offered by run-of-the-mill mutual funds, annuities, and most publicly traded stocks? If you have exceptional experience in a given industry and you are a skilled investor with a deep and thorough understanding of risk and due diligence, you may consider committing a portion of your IRA that you can allocate as risk capital to a Self-Directed IRA and invest it in private placements.
Indeed, recent changes to the law have made it much easier for early-stage companies and startups seeking to raise capital to connect with individual investors such as yourself who are seeking investment opportunities: Most notably, a recent phenomenon called “Crowdfunding.
What is Crowdfunding?
Crowdfunding is a way for companies to raise small amounts of capital from many different investors over a Web portal or platform. Thanks to the JOBS Act, companies seeking to raise capital are much freer to advertise and communicate with the general public than they were previously, though you must still generally be an accredited investor to participate in crowdfunded private equity transactions.
What is a private placement?
When a young corporation wants to raise capital to expand, invest or bring a new product to market, and is not ready to go through an initial public offering, they typically approach the capital markets. Specifically, they target a network of investment funds, venture capitalists, partnerships, conglomerates, and wealthy individuals who are interested in aggressive investment opportunities that have substantial risk of loss, but also the potential for gain far beyond anything reasonably expected of the broad markets.
These companies will seek to raise either debt or equity capital – and there are no limits to how the deal can be structured. You can elect secured or unsecured debt, senior or subordinated debt, debt convertible to equity (convertibles), preferred stock or shares of common. Everything is negotiable, and you and the issuer are free to strike the deal that makes the most sense for both of you.
With a Self-Directed IRA, account owners control of their IRA investments in a more immediate and personal way. They delegate few investment responsibilities, if any, to professional money managers. The IRS places very few limits on allowable IRA investments. You must take care to avoid certain prohibited transactions, but as long as you comply with a few common sense restrictions, you should run into few problems.
Advantages of Private Placement for Self-Directed IRA Owners
Because these deals aren’t publicly traded, and are generally highly illiquid, investors don’t have to pay extra money for expected return in the form of a liquidity premium. If the company performs well, the absence of a liquidity premium means that ROI may be substantially increased.
Why Use an IRA?
Self-Directed IRAs have all the same advantages and disadvantages that conventional IRAs have: Investments within them grow tax-deferred (tax free, in the case of Roth IRAs). There are no taxes when you sell an interest or when you exit a company at a profit, and no taxes on dividends paid. Exception: If you use leverage within your IRA, your account may be subject to unrelated debt-financed income tax. Speak with your tax advisor about how that tax may affect you.
American IRA is a nationally recognized authority on Self-Directed IRA investing. To learn more about Self-Directed IRAs and other forms of self-directed saving, visit us at www.americanira.com or call us at 866-7500-IRA(472).