Private Placements in IRAs: Why So Popular With Investors?

Private Placements in Self-Directed IRAs: Understanding The Basics GUIDE
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Private placements —stocks, bonds, or securities sold on the private market, instead of on the public exchange— make up a huge portion of our clients’ IRAs. An extremely popular investment, they’re one of our most popular (next to real estate), as typically they aren’t offered at regular retirement providers like Fidelity or Schwab. Investors use private placements to use their retirement savings to fund start-ups, technology, business expansions, and more in exchange for stock options and equity not available to the general public. An excellent opportunity with a market primed for investment, and self-directed IRAs make it possible.


What’s the Difference Between Private Placements and the Stock Market?

The biggest difference between private placements and traditional offerings is that private placements aren’t offered on the public stock market. They’re private, bought and sold by private investors, and aren’t listed on the exchange.

Sometimes startups and other businesses look for private financing, instead of going through more traditional loan providers. With this method, they can control the price and amount of stock bought and sold, enabling more control over the process and the business. These investors have the opportunity to reap big rewards if the company does well— whether it eventually goes public or not.


Why Do IRA Investors Like Private Placements?

Private placements give you the opportunity to get in on the ground floor, with the potential for some major gains later on. It’s how so many companies built the fortunes that sprinkle the tech landscape currently— with private funding and capital. Not every company is publicly owned and on the market for sale— here’s how to access those private deals and invest with your retirement savings.

Coupled with the ability to fully pick, choose, and vet your investment offerings. Find deals through networks, financial professionals, friends— expand your potential gains.


Relevant: Understanding Private Placements in Self-Directed IRAs


Benefits for Small Business Owners

If you own or work for a company that could use some funding, you could benefit from self-directed IRA investors. Access investors and capital that you didn’t realize you had access to!

Just remember— if you own more than 50% of the business, you count as a disqualified person.

Private placements have many benefits for small business owners. They get to set a price and amount of stock for investors, and investors make massive gains they can’t find in the traditional stock market.


Common Types of Private Placements

The most common types of private placements are:

  • Buying private stock directly, like investing in a startup before it goes public
  • Capital Investments in a fledgling start-up
  • A group of investors partnering to make investments
  • Secured and Unsecured Notes
  • LLCs/LLPs

Do keep in mind before investing, these investments are generally exempt from SEC registration and regulation requirements. There can sometimes be issues valuing and reselling these assets, depending on popularity, so it’s worth discussing with a tax or legal professional to discuss the pros and cons before investing.


What We Look For When Funding Private Placement Investments

When funding these deals, a few things can speed up processing:

  • Fill out IRAR’s Buy Direction Letter completely and accurately, remembering to sign and date at the end. Incomplete paperwork is the most common cause of transaction delay.
  • Make sure the information on your IRAR paperwork matches what’s on any supporting documents— we do check! If we have any questions or clarifications, we have to go back to you to confirm, which can slow down the process.
  • Do not sign documents where “purchaser’s” signature is required— the purchaser is your IRA and IRAR will sign on behalf of your IRA.
  • Do sign “Read and Approved” on every page requiring a purchaser’s signature, acknowledging you’ve read and agreed.
  • Verify all assets are correctly vested in the name of your IRA (i.e. IRAR Trust Co. FBO Jane Doe IRA 12345). Your IRA is the owner of these assets, and any alternate titling will not be allowed.
  • If asked to provide tax information or a physical address, use IRAR’s information. You can find our EIN and mailing address on our Private Placement: Buy Direction Letter, or by contacting a representative.


After we’ve received your funds and verified all your paperwork is in order, your purchase should be processed in 2-3 business days.


Keep Prohibited Transactions in Mind

As with all self-directed IRAs, you need to keep prohibited transactions in mind when investing in private placements. Avoid deals or transactions with any prohibited investments, disqualified persons, or companies where any disqualified person (including yourself) owns over 50% of the company or investment.

So that means if you personally own 100% of a company, your IRA can’t invest (that would be a prohibited transaction). However, if you were an employee of a company where you owned some stock (but under 50%), your IRA may be able to proceed with the investment.


Don’t Skip Your Due Diligence

As with all investments, you need to do your due diligence to ensure the soundness of your investment. Verify the legitimacy of all parties and investments, including the company, lawyers, and any investment provider. IRAR doesn’t promote or vet investments, so if you need additional guidance we recommend reaching out to a financial or legal professional.


In a Nutshell

There’s the potential to get in on the ground floor with the “next big thing”— with private placements and your self-directed IRA. Though they come with their own risks, the rewards can be massive— and many investors think they’re more than worth it. Our most popular asset class, after real estate investments.

If you’re thinking private equity might be the investment to take your retirement to the next level, IRAR can help. Our team is all CISP certified and has an average of 8 years’ experience. We’d love to help! Sign up for a free consult to chat with our experts.


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