investing in private companies

Using a Self-Directed IRA to invest in
private companies is a choice many of our IRA Innovations clients make. Why? There are many reasons, but it often has to do with the realization that companies like Facebook, Google, Disney, LifeLock, and HP started out as private entities. These went on to become giants in the American business world, and the private companies you invest in now with your Self-Directed IRA could go on to see such success too.

So what exactly is involved in investing in private companies? 

Private placement is a term that refers to investing in privately-held entities, such as companies or small businesses. Also called private equity, this option consists of ownership interest in companies that are not publicly traded on a stock exchange. There are many options, such as:

  • LLCs
  • Corporations
  • Partnerships
  • Start-up businesses
  • Real estate ventures
  • Hedge funds
  • LPs
  • Crowdfunding
  • REITs
  • Promissory notes with equity conversion options
  • Pools of property investments

One example of private equity investing that many people may be familiar with is buying a stake in a young, growing company. Many of these companies turn initially to individuals, or “angel” investors, for funding to add people, equipment, technology, expertise, and marketing. For a start-up company seeking funds for these types of operating costs, obtaining capital from a Self-Directed IRA account owner can be a more simple and faster process than going through a traditional loan process with institutional lenders. 

If you are a Self-Directed IRA owner, investing in private companies has the potential to provide higher returns than more traditional investment options, such as the stock market or CDs. The growth of your Self-Directed IRA will be tax deferred, or tax free if it is a Roth, and revenues and returns go back into the IRA itself. In order to find out about these alternative options, investors typically talk with financial advisors and attorneys, or they find out about them through investor clubs and the internet.

Have you considered this about investing in private companies? 

Due diligence is an extremely important step when considering a private placement investment. To begin with this process, you will have a Private Placement Memorandum (PPM). This document is provided by the private company to entice investors into the particular opportunity being offered. It provides a beginning for what investors need to know to make an informed decision, such as:

  • Offering structure
  • Share structure
  • Company information
  • Background and information about the principals
  • Description of securities
  • Possible risks involved with the investment
  • Disclaimers
  • Management information
  • Use of proceeds
  • Forecasts of expected returns

You review this document to make sure it is the investment decision you want to make. Additional due diligence may involve: analysis of the demand for the product or service being offered; information on current competitors in the marketplace; reviewing marketing materials; phone calls with the company principals or key employees; and face-to-face meetings. Also speak with your financial advisor and others to get their perspective on the investment. 

It’s important to note that some entities do not allow investors to sell or withdraw funds for a fixed amount of time. This may make more of a difference to you if you are close to retirement. Make sure this will not interfere with your required minimum distributions. 

Another thing to understand is that investing in private placements is highly controlled. Most private placements are only available to accredited investors. In order to qualify as an accredited investor in the U.S., you must meet at least one of the following criteria under the Securities Act of 1933: 

  • You must earn an individual income of more than $200,000 per year or a joint income of $300,000 in each of the last two years. You must reasonably expect to maintain the same level of income.
  • You must have a net worth exceeding $1 million, either individually or jointly with your spouse.

If you like the idea of taking a chance to help young, growing companies and if you feel you are well-informed about the private placement market, this investment option can be a win-win situation. The private placement owner, such as a start-up business owner, gains access to the capital they need. You gain the potential to reap a higher return on your investment and have the opportunity to significantly diversify your retirement portfolio. 

IRA Innovations will never recommend or endorse any investment. Investment research and decisions are strictly up to you. We do not offer investment, tax, financial, or legal advice, but we can help you set up a Self-Directed IRA. For more information about investing in private placements and other alternative investments with your Self-Directed IRA, contact us today

Learn more about the basics of Self-Directed IRAs from IRA Innovations in Birmingham, AL. 

IRA Innovations provides self-directed retirement account administration and education in Birmingham, AL, Tuscaloosa, AL, and Nashville, TN. As the experts when it comes to “alternative” investments including private equities, they can provide the necessary tools and information to get started with a Self-Directed IRA.


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