Investing in Private Placements with an IRA
Accredited investors choose to use IRA funds to invest in private placements, sometimes referred to as private equity, as part of a long-term investment strategy.
A Private Placement is an offering of unregistered, not publicly traded securities such as private stock, warrants, bonds or membership/ partnership interests offered by a privately held company usually to raise additional operating capital. These investments offer the potential for higher returns but with greater risk.
IRA funds can be used to invest in private equity, hedge funds, offshore funds, and private real estate funds. Investors should closely review all investment-related documentation including the entity’s operating agreement, private placement memorandum and subscription agreement to better understand the terms, conditions and possible future financial commitments associated with this type of investment.
Private placement investments may trigger Unrelated Business Income Tax (UBIT) on Unrelated Business Taxable Income (UBTI) that may be generated by the investment. For example, if an investment is structured as a pass-through entity (LP or LLC) and the entity produces and sells goods or provides services, the IRAs’ share of the net income will be considered UBTI and the IRA is required to pay income tax (UBIT) at current trust tax rates. A review of IRS Publication 598 with your tax accountant will be worthwhile to completely understand the potential tax implications.
Advantages of Investing in Private Equity Through Your Self-Directed IRA
The IRA owns the private stock. All stock is owned by the IRA, and it receives all rights and responsibilities. The purchase is made in the name of Forge Trust FBO (IRA Account Owner).
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. Forge Trust handles everything from small enterprise to billion dollar private equity investments.
Private placement investments include:
Exchange Traded Funds
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 Forge Trust 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.
Most private placement investments are limited to accredited and institutional investors. You are considered an accredited investor if you alone have a net worth of at least $1 million (not including your private residence) or you have earned annual income of at least $200,000 for the last two years. For couples, the annual combined income minimum is $300,000.
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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