What is a Private Placement?
Self Directed IRAs offer investors the opportunity to diversify their retirement portfolio outside of Wall Street. A private placement investment in a Self Directed IRA is when an investor’s retirement funds are placed into a privately held company such as an LLC, private equity fund, hedge fund, startup, and small business.
Private placements typically have a 3-5 year holding period before an investor can cash out or liquidate their position. This holding period encourages the use of IRA funds (rather than personal funds) for private placement investing. While it is important to have real time access to personal assets, retirement assets can be “locked up” for a period due to IRS imposed inaccessibility. In most cases the retirement funds may not be accessed until retirement age at 59.5. Additionally, savvy investors understand that many private placement investments have a high risk/high reward ratio, and would like to see any possible appreciation take place in a tax-advantaged account.
Private Placement Investment Considerations:
Eligibility: Public companies are traded on the open market and are regulated by the Securities and Exchange Commission. Private Placements are not as highly regulated and generally require investors to be accredited because of the additional risk involved.
Due Diligence: Before investing in a private placement, investors are encouraged to perform thorough due diligence and consult with a financial professional to determine whether the investment is a good fit for their financial situation.
Investment sponsors provide paperwork to their investors outlining the details of their offering. For LLCs, Articles of Organization and an Operating Agreement are provided. For funds (such as private equity funds or hedge funds), a Private Placement Memorandum and Subscription Agreement are prepared by the investment sponsor. These documents outline:
- nature of the investment
- company structure
- expected returns
- risk factors presented by the investment
Interested to learn if your investment idea will work with a Self Directed IRA?
How To Invest in a Private Placement with Self Directed IRA Funds:
Madison Trust has streamlined the investment process, making it easier than ever to invest IRA money into privately held businesses.
Step 1: Create a self directed ira
To establish a Self Directed IRA, contact a Self Directed IRA custodian and complete the Account Application.
step 2: Transfer funds into the new self directed ira
Accountholders may transfer funds from an existing IRA or roll over funds from a former employer’s plan, such as a 401(k) or 403(b).
Step 3: Invest in the Asset of your choice
Instruct your Self Directed IRA custodian to invest your IRA funds into the private placement of your choice.
IRA ownership in a private placement is titled as follows: “Madison Trust Company Custodian FBO [your name][Madison account #]”.
The following documents, along with an Investment Authorization, are required by Madison Trust Company for private placement investments:
LLC Minority Interest:
- Articles of Organization
- Operating Agreement
- Certificate of good standing (if entity exists for more than 12 months)
- Subscription Agreement
- Private Placement memorandum