12 Nov Pre-IPO Investing with a Self-Directed IRA
The virtues of pre-IPO investing cannot be understated. Combining the opportunity of pre-IPO investing with a tax-advantaged account like a self-directed IRA is one of the secrets to great wealth. Not only are investors able to reap the rewards of immediate public stock value accretion, but they do so with the funds held in a tax-advantaged account, saving them on normal income and capital gains taxes. This is how Mitt Romney was able to swell the value of his retirement account. If every positive return investment you made avoided taxes, what would it be worth to you? That’s one of the major draws of a self-directed retirement account. Here we’ll discuss the self-directed IRA opportunity: what it is, what it means, how it works and how to use your retirement account to invest in reverse merger and pre-IPO deals.
What is a Self-Directed IRA?
As the graphic above depicts, a self-directed IRA is a uniquely-structured individual retirement account that allows for more flexible and broad investment options than a typical custodian-driven IRA. With a self-directed IRA, the account is held under an entity one-step separated from the account owner, but the IRA account owner becomes manager of the LLC. This means the owner is not limited to investing in only the custodian-provided investments in a typical IRA. In most cases, a self-directed IRA is set up with what the industry refers to as “checkbook control” over the account. The IRA owner can use his/her checkbook IRA to write checks directly from the IRA LLC into potentially more lucrative investments. It’s the IRA’s unique and completely legal structure that provides the investment account flexibility for investing in alternative assets.
Such a unique structure can be set-up as a traditional or Roth and can be done from scratch or the funds can be pulled in from an IRA rollover scenario from a previous employer. If created from scratch, the IRA account holder will need to follow the rules of annual contribution limits set forth by the IRS.
How to Invest with a Self-Directed IRA
With only a few minor IRS rule limitations, the tax-advantaged IRA can be directed toward more lucrative investment opportunities including, but not limited to:
- Real estate, real estate liens and deeds and financial paper
- Private equity, private placements & crowdfunding
- Gold, silver and other precious metals
- Mineral rights
- Small business franchises
- Alternative investments and alternative funds
- Private loans and other financial paper backed by physical assets
- Reverse mergers, RTOs, APOs and pre-IPOs
For the latter opportunity, there are a number of ways in which a self-directed IRA investor could chose to invest in pre-IPO opportunity. If a company is performing a traditional IPO, it’s tough to get in to those deals. Unless you put up some seed capital with your IRA at the company’s inception–or through subsequent investment rounds–you’ll likely either need to know one of the founders or have some inside angle to get access to the stock–both of which are highly unlikely. In our case, we use micro-investors (sometimes within a self-directed IRA and sometimes without) through associated brokerage firms to assist in the creation of public shells for reverse merger. There are a number of deal structures we use that differ slightly. Each can be implemented in a way that makes IRA investors comfortable and confident.
Avoiding Risks and Scams
I personally hold the investment monies in an IRA as sacred. As a tax advantaged account it is extremely important that investing using these funds be done with a similar solidarity as doctors who take the Hippocratic Oath: “First do no harm” (Latin: Primum non nocere). That is, avoiding major downsides in a self-directed IRA is paramount. The stories of pre-IPO investing gone awry were perpetrated by con-artists preying on the ignorant. With a little bit of education and the proper structure, investors can be confident they’re IRA money is in the best place for maximizing returns.
Avoiding scams in reverse takeover investing with a self-directed IRA is a bit more simple. Keep in mind, we’re not investment advisors and don’t tell where or how to invest, but the reverse merger and APO process has several areas where financing and share purchases take place that, if done correctly, can provide high, but very secure and risk-mitigating returns for investors. Except for rare cases, the self-directed IRA holders funds are placed in a strict escrow account, ensuring that access to the funding is prohibited until shares are liquid and investor exit is ensured.
Set-up Cost and Timing
We work with a number of direct partners for setting up tax-advantaged self-directed retirement accounts. We can typically get the accounts set up and activated for less than $2,500. The annual costs are typically between $100 and $300, depending on your IRA custodian. The annual costs can actually be much higher if you live in tax-terrible states like California. The timing for getting your self-directed account set-up is typically done in one to four weeks, depending on the timing of fund rollovers from previous custodial accounts.
I like to put my money where I know it is protected and where risks are greatly mitigated. Investing an IRA in pre-IPO, APO or RTO opportunities–when done correctly–represent a viable investment alternative and extra method for boosting the value of your after tax retirement nest egg. Contact us to find out more.