As you look to use your self-directed IRA to broaden your investment holdings, you may come across opportunities to invest in private stock. Among many individuals, this type of investment is among the least familiar, and potentially most confusing. Let’s take a look at some of the basics about using your self-directed IRA to invest in private stock.
Let’s first make sure we understand what we’re talking about when we use the term “private stock.” In the broadest possible terms, shares of “stock” in a company represent ownership interests in that company. Depending on the type of stock the company chooses to issue, this ownership interest may include the right to receive dividends (should the company choose to pay them), to vote on certain matters relating to the company’s governance, and to receive money back in the event of a company liquidation (if there are funds available after repaying company debts and other obligations).
Most individuals who are saving for retirement are familiar with stocks in the context of “publicly traded” securities. Publicly traded stocks on those in which buyers and sellers conduct their transactions on a public stock exchange, subject to the rules and requirements of the exchange. In the United States, publicly traded stocks are also subject to a number of disclosure and informational requirements promulgated by the U.S. Securities and Exchange Commission (SEC).
The purpose of the SEC disclosure requirements is to make sure that the general public has enough information to make informed and reasoned decisions about whether or not to invest in a particular company’s stock.
But while most of the largest and well-known U.S. companies are publicly traded, other companies choose to forego access to public securities exchanges in order to avoid these disclosure obligations. In doing so, U.S. law provides that these private companies can only accept funds from investors if those investors are considered to be advanced and experienced enough that they do not need the protections afforded by the SEC disclosure rules.
The SEC uses the term “accredited investors” to refer to individuals who can invest in private company stock. Under current law, an accredited investor is an individual who either (i) has an income in excess of $200,000 for each of the last two years (and reasonably expects to have a similar income this year), or (ii) as a net worth in excess of $1 million, not including their primary residence.
If you meet the requirements for being an accredited investor, and wish to use your self directed IRA to invest in private companies stock, it’s absolutely essential that you do your research before committing any funds. This level of due diligence will be far in excess of anything you’ve done previously before making an investment in publicly traded securities.
You may also wish to consult with a self-directed IRA custodian such as Quest Trust Company in order to be sure you are following the proper steps for such a private company stock investment.