Not an accredited investor? Investing in a private company is still possible with your self-directed IRA

Estimated reading time: 3 minutes(Last Updated On: November 30, 2018)

Investing in a private company often means having to be an accredited investor. But if this type of investment interests you, then you’ll be excited to learn that you do not have to meet the criteria of an accredited investor to make this investment.

When you don’t want to invest in a publicly traded company

Most people know about investing in publicly traded companies through buying and selling stocks, bonds and mutual funds. When a company is “ publicly traded” (meaning that its common stock trades on a public stock exchange such as the NYSE or the NASDAQ) it is subject to a broad range of disclosure requirements by the SEC. These disclosure requirements seek to ensure that investors and potential investors are adequately informed about the companies they seek to invest in and can make investment decisions on relatively equal footing with one another.

Investing in a private company is also an option with your self-directed IRA

Companies that wish to remain private (and therefore avoid the broad disclosure requirements of public companies) can only accept outside investments in certain situations. One of the most common scenarios is where a company accepts large investments from a relatively small number of “accredited investors.”
In order to be considered an accredited investor, an individual must have:

    • a net worth of at least $1 million (excluding the value of his or her primary residence) or
  • have an income exceeding $200,000 for each of the last two years (and a reasonable expectation of a similar income level for the current year)

But even if you don’t satisfy the legal definition of the SEC term “accredited investor,” your self-directed IRA can still invest in a private company.

Investing in a private company without being an accredited investor

For example, the SEC registration and disclosure obligations do not apply to certain types of nonpublic offerings. This means that if you know someone who is starting a business or looking to expand his or her current business, you may be able to invest in the private company, provided that he or she is  not soliciting investments from other investors. A major caveat is that the rules governing these types of transactions are not always easy to understand, so if you believe you have an appropriate opportunity for investing in a private company, you should consult with your legal advisor before committing any of your funds.

Furthermore, don’t mistakenly assume that investing in a private company structuring means structuring that investment as a direct and immediate equity investment. You may find that there are myriad opportunities for making secured loans to private companies at interest rates that can generate significant returns for your account. These loans could also be structured in ways that can provide you additional financial upside if the company you are investing in succeeds.

An experienced self-directed IRA custodian such as Quest Trust Company can also help you to ensure that you are following all the applicable rules and regulations.

Quest Trust Company helps change people’s lives and financial future through self-directed IRA investment education. Quest Trust Company helps people invest in what they know best and build their financial future on their own terms.