There are many investments one can select to do with his self-directed IRA. Some are more risky then others. But since we self-direct, meaning we choose to direct our IRAs as we see fit, we have the ability to invest in anything that the IRS allows.
We at IRA Innovations have noticed that more of our client base is investing in a Private Placement, which can be a fund, an LLC, or other structure such as a partnership that invests in pools of properties, loans, businesses and more. The private placement is the memorandum used to entice the investor into the particular opportunity being offered.
So what is a Private Placement?
I found this humorous story from Lisa Bromma, consultant for Oceanpark Marketing, who has worked with hedge funds as well as several IRA administrators and custodians to explain Private Placements. Her story illustrates exactly how this works.
Mary Ross, mother of 2, has spent thousands of dollars in dry cleaning or throwing her toddlers’ clothes away due to stains from them wiping their mouths on their sleeves instead of using a napkin.
Frustrated, Mary tried to come up with an idea to save her children’s clothes from total destruction after one wearing. Why not develop a throw away napkin of sorts that can be affixed to the sleeve of her child’s clothes and then be removed when the child is done eating?
Mary ran her idea by a few of her friends from her local mothers group. They were encouraging. She made samples of the arm slings that were affixed with Velcro. The mothers who tried it loved it! They started ordering dozens of these. Mary needed a one-word name to meet the needs of her clients. She decided on Slopkins!
Mary met with an attorney who went through the process of helping her start her business. She needed some cash infusion so Slopkins could mass produced and marketed. Her attorney recommended a private placement. They put a memorandum together, that described the idea, the investment formed an LLC (Limited Liability Company) and away Mary went trying to “sell” her idea to others.
Many people used their IRA dollars to invest in Mary’s idea. They understood there were no guarantees of a payback and that, basically, they could lose their investment. But so many believed this was the best invention in years that Mary was able to raise her initial $5 million and production began
Mary proceeded to raise the capital through her Private Placement. She went around the country demonstrating Slopkins to every Major Day Care Company in the Country.
Eventually one of the day care companies, Donald Duck’s Playschool, bought Slopkins for $25 million. Mary paid off her investors and retired to Hawaii where she is busy with a new idea for protecting one’s home in lieu of a security system: a barking doormat!
All kidding aside, Private Placements work just the way this story describes them. They are not for people who need their last dime to survive. Generally, investors hear of Private Placements through their Financial Advisor, their Attorney, or more recently through investor clubs and even the Internet.
As with any investment, it is up to you to do your due diligence. Private Placements can be self-directed with an IRA through an administrator who does record keeping for these investments. As you know, IRA Innovations does not give investment advice or make any recommendations. We simply follow your direction. The decision is yours!