Private placement investments open a lot of opportunities to the investing public. All the more, old regulations restricting such investments to just accredited investors has been amended to reflect today’s economy. At present, even non-accredited investors can participate per Title III and Title IV of the Jumpstart Our Business Startups (JOBS) Act of 2012. Before deciding which types of private placement suits your situation, review these helpful tips we’ve consolidated.
5 Must-Know Tips for Private Placement Investments
1. First Order of Business: A Self-Directed IRA
If you are looking to invest in private placements, you need to set up a self-directed IRA first. If you have existing IRAs of any type or some other retirement accounts like a 401k that meet certain qualification requirements, you can simply roll over those accounts into a self-directed IRA. With a self-directed IRA, an investor can choose where to put his money outside traditional investment options like stocks and bonds.
2. Look for a Reputable Self-Directed IRA Custodian
Unlike other IRAs where brokers and custodians place investments in trusted networks, most self-directed IRA custodians do not assess and investigate investments one might want to invest in their account. It is the investors’ responsibility to research about the investment. You should look for a custodian that has reputable experience and concentration on private placement investments.
3. There Are a Lot of Options
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Options after options after options. Is this a boon or bane? One shouldn’t view it dull or burdensome to weigh which type of private placement is best. This is necessary. After all, nothing good comes easy. You can choose from the following options depending on your goals:
- Limited Liability Companies (LLC)
- C corporations
- Limited Partnerships (LP)
- Pooled investment funds
- Hedge funds
- Small businesses
- Equity crowdfunding
- Convertible notes
- Land trusts
4. There Are Risks
By definition, private placements are offerings of a company’s securities only offered to selected investors. They are not registered with the Securities and Exchange Commission and are not offered to the public.
Start-up companies wanting to fund their businesses usually offer private placements. Hence, investing in a private placement usually means funding a company with a limited track record. Growing your money is totally dependent on the start-up company’s performance. To add to that, private placements are also illiquid making it hard to sell them.
As mentioned earlier, self-directed IRA custodians do not dig deep with investments like this, adding another layer of risk. Though, this can be prevented by consulting with highly experienced, knowledgeable investing professionals.
5. Be Mindful of IRS Rules on Private Placements
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You have to do your homework on IRS rules concerning private placements before making any moves. This is important to prevent penalties. You can sabotage your tax-deferred money if you are not careful. For example, the IRS has a regulation for self-dealing. One is not allowed to invest IRA funds into a family member’s company. Furthermore, an investor cannot invest in the same company using other means aside from his already invested self-directed IRA funds.
Before placing your hard-earned retirement funds into private placements, look for a professional who can clear up any questions or confusions you have. While it is a good to thing explore other investing options, protecting yourself from potential losses should be your primary consideration. Invest smartly and soundly.
Do you have any other tips you’d like to share with us? Let us know in the comments section below!