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Diversifying Your Investment Portfolio? How to Invest Your Retirement Funds in Private Placements

diversify-private-placementsEstimated reading time: 4 minutes

Looking to diversify your retirement portfolio? "Private Placements" is a term that refers to investing in privately-held entities, such as companies or small businesses. Investing in Private Placements using a self-directed IRA can be a simpler and faster process than acquiring a loan with institutional lenders. For self-directed IRA owners, this type of lending has the potential to bring higher returns than traditional investments such as the stock market or CDs.  Also, note that with potential for higher returns comes higher risks.

Private Placements - The Basics

  • Private placements are used by companies to raise capital (i.e., startups)
  • Each type of private placement dictates the types of investors who can invest
  • Banks have tightened their purse strings lending to new business startups, creating a higher demand for development capital from investors
  • Obtaining capital from a SDIRA owner can be simpler and faster than the loan process with institutional lenders
  • Potential higher returns however exposes investors to higher potential for loss
  • Most securities are restricted therefore hard to resell/liquidate
  • Securities and Exchange Commission (SEC) has educational material regarding private placements

Your self-directed IRA can invest in Private Placements such as: 

  • LLCs
  • Liimted Partnerships (LPs)
  • C corporations
  • Private stock
  • Partnerships
  • Small businesses
  • Real Estate Investment Trusts (REITs)
  • Pooled investment funds
  • Land trusts
  • Secured and unsecured notes
  • And more

Important Due Diligence for Private Placements

It is very important that you understand what it is you are investing in. Find out as much as possible about the company and the investment. Here are some tips to keep in mind:

  • Beware promises of high returns. If it’s too good to be true, it probably is.
  • Investigate the background of the broker or company principals. Meet the representative in person. Visit their office, if possible. Keep detailed notes on all conversations that you have with officials.
  • Ask for copies of written materials before making an investment.
  • Research risks and how you might liquidate your private placement securities.
  • Review the Private Placement Memorandum (PPM) and consult with a financial advisor.
  • Research whether the private placement is being sold on a conditional basis. Sometimes, certain conditions need to be met, or a specific dollar amount invested. An offering without a minimum level of investment amount and other conditions such as deadlines could be a red flag. The issuer can use the proceeds immediately.
  • Research the return policy should the private placement not fund.
  • If you are close to retirement, make sure that you will be able to make your required minimum distributions. Some entities do not allow investors to sell or withdraw funds for a fixed amount of time.
  • Pass on the investment if you are asked to falsify any financial information to qualify as an accredited investor.
  • Do not complete a Subscription Agreement or Accredited Investor Questionnaire unless you understand it and agree with the entire document.
  • Do not invest if the seller can’t satisfactorily answer your questions about the company, its business model, and its executives’ experience.

How an Entrust Client Invested in Private Placements with a Self-Directed IRA

John Wood is an entrepreneur and his annual income is $150,000. He’s interested in investing part of his retirement funds in a local startup he thinks is going to be successful. John opens a self-directed IRA at Entrust and decides to rollover $40,000 from an old employer’s 401(k) to Entrust. Based on Title III, John will be able to invest up to $15,000 (10% of his annual income) in the startup. John conducts due diligence on the investment:

  • Asks for copies of written materials
  • Researches the background of the broker and company officials
  • Investigates the investment risk
  • Reviews the private placement memorandum and consult with a financial advisor
  • Researches the return policy
  • Meet the representative in person
  • Ensures that the transaction does not involve any disqualified persons

John decides it is a safe investment that fits his retirement strategy. He provides the investment documentation to Entrust. John directs Entrust to purchase the investment on behalf of his account. Entrust sends the $15,000 to the broker. The purchase is complete! John’s self-directed IRA now owns part of the startup’s equity. 

To learn more about the different ways your IRA can invest in private placements, or to make a private placement investment, please contact us today or read more information about private placements here.

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