Download Understanding Private Placements in Self

Making self-directed retirement easy
Private Placements
in Self-Directed IRAs
Guide & FAQs
Making self-directed retirement easy
What are Private Offerings?
The Dow. The NYSE. NASDAQ. These stock markets dominate investment websites and
the business sections of daily newspapers. But individual investors have other options.
They can invest their retirement savings in an increasingly diverse range of unconventional
assets, some of which may not have been imagined as retirement plan assets when the first
IRAs came on the market. Some of these most popular assets include private offerings or
ownership of private stock.
Private Placements
Private placements–also called private stock–offer the opportunity to invest in privately
held entities that are not sold in the open, public market. They often involve limited
partnerships, limited liability companies, and similar entities. These investments are offered
to a small audience of investors, who may include individuals. Typically, detailed financial
information is not disclosed and there is no prospectus. Instead, investors are presented with
a private placement memorandum or PPM.
Limited Liability Companies
An LLC (limited liability company) combines certain characteristics of a corporation, a
partnership, and a sole proprietorship. Like a corporation, an LLC protects the principals
from personal liability. Like a limited partnership, an LLC separates the business assets
from the owners’ personal assets. While an LLC is easier to set up than a corporation, the
LLC must file articles of incorporation with the state where it resides.
Limited Partnerships
In an LP (limited partnership) the liability of the limited partners is limited to the amount
they have invested. This protects the personal assets of the limited partners if the LP fails.
Like any other partnership, each partner contributes, whether that is skill, labor, property,
or money. Typically in an LP, the day-to-day business is run by a general partner. The
limited partners (sometimes called silent partners) don’t make managerial decisions.
Promissory Notes
Promissory notes are more formal than an IOU, but less formal than a loan from a bank.
A promissory note can be entered into by an individual or an enterprise and, if they are
unconditional and saleable, they can be bought and sold. In effect, an IRA can be the bank,
when you invest in:
• Secured promissory notes are a form of debt backed by collateral such as a mortgage or
deed of trust, in which a borrower promises to return the lender’s funds (IRA money.) If
the borrower defaults, the asset it has pledged as collateral can be sold to repay the note.
• Unsecured promissory notes are a form of debt not backed by collateral, in which a
borrower promises to return the lender’s funds or pay back the IRA over a period of time.
Making self-directed retirement easy
The Advantages of Investing
in Private Offerings Using
Self-Directed IRAs
Alternative investments like private offerings, LLCs, and
LPs are gaining favor among investors. The 2016 Natixis
Global Survey of Individual Investors found that twothirds of investors no longer believe that a traditional mix
of stocks and bonds is the best way to pursue returns and
manage investments. And while non-traditional investments
are permitted in IRAs, big custodians or banks typically do
not allow such unconventional assets in IRAs.
Obtaining capital
from a self-directed
IRA is a faster,
simpler way for
companies and
entrepreneurs to
raise needed funds.
Recent research conducted by the US Government
Accountability Office into the extent and treatment of
unconventional assets in IRAs and 401(k) plans confirmed
their popularity among investors with self-directed
accounts. While the IRS only started gathering data on
the use of unconventional assets in self-directed accounts,
the GAO found that, at the end of 2015 there were nearly
500,000 self-directed retirement savings accounts with an
aggregate value of nearly $50 billion. The vast majority of
those accounts and that value are in IRAs.
For self-directed IRA owners, this type of investing
has the potential to bring higher returns than the stock
market or CDs, despite the higher risk. For entrepreneurs
and companies seeking funds, obtaining capital from a
self-directed IRA owner can be simpler and faster than
obtaining a loan from an institutional lender.
Over the last 20 years, IRA Resources, Inc. has seen the
percentage of our clients who buy into private investments
increase dramatically. Today, they are one of the most
popular investments among our self-directed IRA clients.
Of course, the higher level of risk makes it essential
that you consult with your tax or legal advisor before
proceeding with the investment.
Prohibited Transactions
There are rules that you must follow when investing in
these non-traditional assets. Be sure to understand what
these rules are so that you do not lose the tax-favored status
of your account. Many of those topics are addressed in the
FAQs at the end of this report.
For more information, IRS Code 4975 addresses
prohibited transactions in detail. You may also visit the IRS
website for more FAQs related to various IRA plans.
Making self-directed retirement easy
Due Diligence Needed Before Investing in
Private Stock, LLCs, LPs with Your IRA
As with any investment, you need to do your due diligence. Investors who lack the
time or expertise to research a particular private investment often rely on their
financial advisor for that kind of advice. Whether you work with an advisor or
do your own research, 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:
Do Your Research
Protect Yourself
• Investigate the background of the broker or
company principals. Whenever possible, visit
the office and meet the representative in person.
• If you are close to retirement, make sure
that you consider how you will meet your
obligation to take required minimum
distributions. Some entities do not allow
investors to sell or withdraw funds for a fixed
amount of time.
• Research risks, restrictions, and liquidity of the
specific private investment.
• Find out if it is being sold on a conditional
basis. For example, some private placements
require a specific dollar threshold to be reached
before the investment will move forward.
• Research the return policy should the private
investment not generate enough interest to fund.
• Do not complete and sign a Subscription
Agreement or Accredited Investor
Questionnaire unless you understand and
agree with the entire document.
Get it in Writing
Look for Red Flags
• Ask for copies of written materials before
making an investment.
• Promises of unrealistically high returns. If
it’s too good to be true, it probably is.
• Keep detailed notes on all conversations that
you have with officials seeking your investment.
• An offering without a minimum level of
investment and other conditions such as
deadlines.
• For private stock, review the private placement
memorandum (PPM) and consult with a
financial advisor.
• The seller can’t satisfactorily answer
questions about the company, its business
model, and its executives’ experience.
Making self-directed retirement easy
Three Deal Breakers
Walk away from the deal if:
You are asked to falsify any financial information to
qualify as an accredited investor.
The promoter, broker, or company officials refuse to
answer questions.
The IRA administrator is endorsing or recommending
the investment. Self-directed IRA administrators should
never give investment advice.
Self-Directed IRA FAQs
To view frequently asked questions regarding your
Self-Directed IRA, visit our FAQ page.
CLICK HERE
Making self-directed retirement easy
How IRA Resources Eases the Way to
Private Investments in Your IRA
IRA Resources has the processes and professional staff in place to make sure
your private investment transactions are completed efficiently and easily.
•Open an account at IRA Resources and fund it with a contribution, transfer,
or rollover. Our trained professionals will help you through this process as
needed. Your account must have enough funds to cover the purchase, fees,
and maintain the minimum account balance.
•Some offerings require investors to provide a passport, driver’s license, or a
utility bill. In this case, you need to provide IRA Resources with the same
easy-to-read copies of each document.
•If you are investing in an LLC or private stock, complete and submit a
Private Placement Buy Direction Letter and Private Placement Disclaimer
& Indemnity Agreement to IRA Resources.
Make sure you include a physical address (not just a PO Box) for the
investment entity.
When submitting the Buy Direction Letter, submit a copy of the
investment purchase agreement or other documents marked “read
and approved” with your signature on every page where signature is
required.
Example: Read and Approved: Your Signature
IRA Resources may reject your Buy Direction Letter if we can identify
that you are engaging in a prohibited transaction such as: you are
a manager in the investment, you have received compensation or
reimbursements from the investment entity or are self-dealing. Please see
IRS Code Section 4975 for more information.
•The purchase agreement must be vested in the name of the IRA. IRA
Resources must sign the agreement on behalf of your IRA.
Example: IRA Resources FBO Your Name Account #12345
•Make sure that IRA Resources has the wire or check instructions to send the
money to the investment entity.
Making self-directed retirement easy
Once Your Private Investment Is Made
Given the number of private investments made by our self-directed account
holders, IRA Resources is familiar with all of the IRS and SEC regulations and
requirements. Our trained staff will handle all reporting and bookkeeping for your
private investments.
But you have a few ongoing responsibilities as well:
•Make sure the entity (company, LLC or LP) sends one copy of all statements,
reports, and notices to you and another directly to IRA Resources. These are
used for the required “fair market valuation” reporting to the IRS. You need to
keep your copies for your own records.
•Check your statements for accurate fair market value of your assets to make sure
it is being reported to the IRS accurately.
•If additional funds are needed for the investment, you will have to submit
supporting documentation to IRA Resources, for example a capital call letter or
email from the entity, requesting additional funds.
•Monitor your account statements and any correspondence from the vendor
about income and expenses related to your account.
•Make sure you have the necessary level of liquidity in case funds are needed to
pay expenses.
•Do not pay for expenses from personal accounts. This is a prohibited transaction.
•Understand when UBIT (unrelated business tax) or UDFI (unrelated debt
financing tax) may apply. Certain investments can generate tax liability.
Remember
You must instruct us to take action for any type of
transaction in your account. Clear communication is
essential to keep your account in a tax-deferred status.
About IRA Resources
IRA Resources, Inc. (IRAR) is the knowledge leader and provider of account administration
services for self-directed retirement plans. For more than 20 years, IRAR has been in the industry,
placing high value on first-hand personal service at a cost-effective price for its clients.
1.888.322.6534 | 6825 La Jolla Blvd, La Jolla, CA 92037 | [email protected]
IRA Resources, Inc. does not promote any investments. Rather, provides the administration, information, and tools to
help make self-direction straightforward, cost effective, and compliant. ©2017 IRA Resources, Inc. All Rights Reserved.
Making self-directed retirement easy
Frequently Asked Questions
Limited Liability Companies (LLCs)
Is having an LLC in my
IRA permitted?
Yes, it’s legal. The Internal Revenue Code doesn’t list the types of
assets that you can invest in; it only states what you cannot invest
in. The only two prohibited assets are life insurance and collectibles
Because an LLC is not a prohibited asset, it is a legal investment for
your self-directed IRA.
I’ve heard the terms “checkbook
control IRA” and “IRA LLC.”
What are these?
When you use an LLC in your IRA, you have checkbook control
of your IRA funds. Checkbook control refers to your ability to
have a checkbook in your hands that is linked to your retirement
funds. When you identify an investment, you write the check–
you’re in total control.
Can I partner with friends and
family in my LLC?
Yes, but partnering with disqualified persons are allowed only
when the IRA LLC is created. Partnering can be a great way to
raise additional capital for the purchases you want to make. The
percentage of ownership in an LLC is determined by the capital
contribution. If your IRA puts $60,000 into the LLC, and your
spouse’s IRA contributes $40,000, it is a 60/40 split.
Can I pay myself a salary to
manage my LLC?
No, earning a salary is self-dealing. An IRA owner can’t benefit from
the IRA’s investments until the assets are distributed. See IRC Code
4975, specifically the benefit rule, for more detailed information.
Can I roll over my current real
estate LLC and its investments
to IRA Resources?
It depends. If your IRA currently owns your LLC, you can roll it
over or transfer it to IRA Resources. If the LLC is currently held
outside of your IRA, you must form a new LLC for your IRA. For a
new LLC, you must create a specific operating agreement that meets
the regulatory requirements to structure your retirement account
this way.
Does an IRA LLC have the same
tax advantages as holding an asset
directly in my self-directed IRA?
Using an LLC in your self-directed IRA does not change the tax
advantages you receive. Your IRA invests in and owns the LLC.
An IRA is a tax-deferred entity, so there is no taxable event in your
IRA when investing directly or through the LLC.
Does IRA Resources handle the
accounting of my LLC?
No, the accounting for your LLC is the responsibility of the LLC
manager or its advisors.
Making self-directed retirement easy
Does IRA Resources handle
the legal work of incorporating
an LLC?
No, IRA Resources is the record keeper for the account. IRA
Resources does not create LLCs or sell any type of investment.
Most custodians or administrators require that you use a third
party to create the IRA LLC.
Does IRA Resources need to
review and approve investments
I want to make with my LLC?
No, when you have checkbook control of your IRA funds
through an LLC, there is no need to involve IRA Resources in
the purchases your LLC makes. You’re in control, and you’re
responsible for knowing and following the rules. It’s very important
that you educate yourself on the rules if you are considering using
an LLC in your self-directed IRA.
What are the advantages of
using an LLC versus just having
my self-directed IRA purchase
an asset?
Advantages of using an LLC in your self-directed IRA include:
• Control - You have a checkbook that is linked to a checking
account that is set up in the name of your LLC under its own
tax ID number. When you identify an investment that you want
to purchase, you can just write a check. You don’t have to fill
out paperwork, get approval from the administrator, or wait for
someone else to fund the investment–you can take care of it
yourself. This can be particularly helpful in investments that have
a limited time period or are being auctioned.
• Cost - Checkbook control can help you avoid transaction and
check-writing fees that are typically associated with a self-directed
IRA. If there are multiple investments in the LLC, your IRA
Resources only charges you for one asset, the LLC.
What happens if my LLC needs
money for repairs or fees and
everything is invested?
If the LLC checking account is cash poor, here are a couple of
ways to get more money in the account:
• Annual Contribution - If you are eligible to make annual
contributions and haven’t done it yet, make your contribution.
You can direct IRA Resources to send the money in the name
of the LLC to you as the manager and deposit it in the LLC’s
checking account. This is applied as additional capital.
• Partnering - If you can’t make a contribution, you can add
partners (as long as the person is not disqualified to the LLC)
or the LLC can get a non-recourse loan. The list of disqualified
people includes you, your spouse, children, grandchildren, parents,
grandparents, and all their spouses. It’s always a good idea to
do your due diligence and refer to IRC Code 4975 to avoid a
prohibited transaction.
Why can’t I have an LLC with the
IRA that I have with my broker?
Brokers sell stock market–based investments. Many brokers
don’t understand self-direction and discourage their clients from
engaging in it. Remember, your broker was trained to sell you
stocks, mutual funds, CDs, and bonds.