Using a Self-Directed IRA to Invest in Private Placements


Victor D. Walker, Esq., Contributing Writer

You can invest self-directed IRA money in private placements, and doing so can help diversify your investment portfolio. Between a traditional IRA, a Roth IRA and a self-directed IRA, the self-directed IRA gives you the maximum flexibility to choose your investments. A custodian or trustee must administer an IRA. However, the owner of the self-directed IRA makes their own investment choices instead of the custodian. Of course it is up to the owner of a self-directed IRA to ensure that the IRA doesn’t contain prohibited investments such as life insurance policies, collectibles and certain precious metal which are explicitly banned by the Internal Revenue Service. Likewise, you cannot sell to your IRA private securities that you’ve purchased outside the IRA; they must come directly from the issuer.

Private Placements

A private placement is composed of securities not registered with the Securities Exchange Commission (SEC). Instead, the issuer takes advantage of Regulation D, which provides a few methods to sell unregistered securities privately to investors. Regulation D (or Reg D) contains three rules providing exemptions from the registration requirements, allowing some companies to offer and sell their securities without having to register the securities with the SEC. (Rule 506 of Regulation D · Rule 504 · Rule 505). The rules require that some or all of the private investors be “accredited.”

Accredited Investors

The owner of an IRA need not necessarily be an accredited investor to buy a private placement, but the issuer might insist upon it, because some private placements, such as those under Rule 504 of Regulation D, are open only to accredited investors. Under Rule 501 of Regulation D, an individual accredited investor must have either $1 million in net worth — not counting a primary residence — or at least $200,000 of income in each of the previous two years. Up to 35 non-accredited investors can purchase an issuer’s private placement under Rule 505. Rule 506 private placements require any non-accredited investors to be “sophisticated,” which means they understand investment risks or have hired someone who does.

Types of Private Placement Investments

Your self-directed IRA can invest in these private placements, such as:

  • LLCs (limited liability companies)
  • C corporations
  • Partnerships
  • Pooled investment funds
  • Small businesses
  • Land trusts

When you invest in private placements through a self-directed IRA, it may be a win-win situation: The business owner gains access to needed capital. IRA investors gain the potential to reap a higher return on their investment. Investors also gain the benefit of diversifying their retirement portfolio.

If you would like to know more about how to set up and use a self-directed IRA or how to raise capital for your business by offering a debt or equity private placement, contact corporate attorney Victor D. Walker at 713-724-5300.



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