How the JOBS Act and “crowdfunding” can help your self-directed IRA in 2013

One of the most exciting provisions to come out of the newly established Jumpstart Our Business Startups (or “JOBS”) Act is the creation of new “crowdfunding” options for businesses and investors.

The concept of Internet-based crowdfunding has already proven to be popular (and often quite successful) in other contexts. For example, the crowdfunding website Kickstarter allows individuals and small companies to request funds from the general public. In the Kickstarter context, participants aren’t investing in the underlying companies; they’re merely contributing funds to help the companies create new products. This is the concept of crowdfunding. The contributors may receive free or discounted products in exchange for their support. Companies that use these crowdfunding portals are prohibited under current SEC rules from taking an interest in the companies themselves. But the JOBS Act crowdfunding provisions will change that.

JOBS Act crowdfunding potential # 1: internet funding portals. Under the new JOBS Act crowdfunding law, Internet funding portals can be created to give unaccredited investors the ability to invest in private companies. The current regulations limit most private company investing activities to “accredited” investors who have a net worth of over $1 million or who have earned over $200,000 in each of the last two years. To protect against fraud, the new funding portals will be required to qualify and register with the SEC. In addition, to further protect investors, they will be subject to certain investment caps each year, based on their income. The most affluent investors will be permitted to invest up to $10,000 per year across all opportunities presented in these funding portals. There may also be other qualifications and limitations that will apply once the regulatory system is finalized and put in place.

JOBS Act crowdfunding potential #2: general solicitations will be permitted. Furthermore, the new JOBS Act will also open the private investing markets to more investors by significantly relaxing the rules on solicitations to the public. The current rules prohibit private companies from soliciting funds from the general public — this is why you don’t see companies offering to sell stock on their websites or through newspaper or televisions advertisements.

The new rules will lift these advertising bans and make it significantly easier for small companies to reach potential investors. This is a great example of how savvy investors can use the JOBS Act and crowdfunding to their advantage. Note that lifting the advertising ban for certain types of offerings won’t change the existing rules on what types of individuals actually qualify to invest. Private company fundraising that’s conducted under Rule 506 of Regulation D can still only allow accredited investors. But since many individuals who now qualify as accredited investors would not otherwise learn of these opportunities, the changes to the solicitation rules will bring more options to many self-directed IRA holders.

Make wise choices with your self-directed IRA

Once the final SEC rules come into effect, you should still consult with an IRA custodian like Quest Trust Company to see exactly how they apply to your individual situation.

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