Private Companies

Investing in Private Companies Via Your Self-Directed IRA

July 12, 2017

Looking for a hot stock deal? Insider trading is a no-no, and getting first crack at an initial public offering is impossible unless you are super-rich and well-connected. Yet there is a way to get the jump on the general public when it comes to owning shares in the next big company: they’re called private placements.

A private placement is the issuance of restricted securities sold privately. These securities, usually in the form of shares, warrants or debt instruments, are exempt from registration with the Securities and Exchange Commission and cannot be issued on the open market. Issuers usually complete a Regulation A or Regulation D filing with the SEC to secure an exemption from registration. Continue reading…

Convertible Debentures – An Option in Volatile Markets

February 29, 2016

Guest post by Nelson Garcia:

The year 2016 has, so far, been the definition of volatility, which for many was unexpected. For some investors, switching from equities to fixed income securities (bonds) would be prudent to ensure the safety of the principal and a fixed return. Continue reading…

Technology Levels the Playing Field for Self-Directed Investors

December 4, 2014

Guest article by Matt Lutz:

Anyone with a self-directed retirement account will tell you adding alternative investments to the portfolio can supercharge investment returns and enables investors to participate in asset classes where they are most skilled and knowledgeable. After one learns about self-directed investing, he or she will typically make the same types of investments utilizing the self directed account that he or she would make outside of the account. A real estate investor who owns single family rental properties will use self-directed IRA (SDIRA) funds to buy single family rental properties or a tax lien investor will participate in tax lien auctions using his or her SDIRA. Assets like single family housing and tax liens are great allocations of SD funds. Individual investors with knowledge of the local real estate market have the same advantage as institutional investors. The barriers to entry are very low. Anyone with money can buy a mobile home, a single family home or attend a tax lien auction. The only restriction is the amount of money the investor has. With knowledge and capital the individual investor can continue to participate in the asset classes.

Self-directed investors it seems by nature are an inquisitive bunch and want to learn about other asset classes. Most have looked at businesses and thought “I wish I could get returns like that” or “how do I invest in something like that?” Many of those businesses or investments are often controlled by institutional investors or specialty finance companies who don’t want anyone entering their markets. One thing we know about competition is that it reduces profits. The institutions want to protect the superior yields they are able to achieve. Prior to a few years ago, if an individual investor could break into those markets, it required a tremendous amount of the investor’s time and energy to find deals and then additional time and effort to conduct due diligence. Technology has changed that.

The most recent credit crisis is a great example of how technology has affected different asset classes. Everyone knows the banks were overrun with non-performing subprime single-family mortgages. A very similar thing happened in the late 1980’s to the Savings and Loans Industry with commercial real estate mortgages. The S & L crisis had the highest number of bank failures since the Great Depression with 797 thrifts shuttered and total assets of $394 billion. The problem was so large the United States government created the Resolution Trust Corporation (RTC) to liquidate the non-performing loans and collateralized assets. The RTC became a massive government institution that existed until 1995 when its duties were transferred to the FDIC. The most recent crisis although much larger (and scarier at the time) was much different. Technology enabled non-performing loans and properties to be sold via online auctions. Not only did technology help liquidate the non-performing loans much faster than the previous crisis but investors, large and small, could participate. Mortgages and REO’s (Real Estate Owned) were sold individually or in pools. An investor with a self-directed IRA could participate in the same auction as a Greenwich hedge fund. The Greenwich hedge fund might have a capital advantage but the individual investor knows his or her local real estate market much better.

So what other asset classes are are now available to individuals because of technology?

Consumer and small business lending are experiencing tremendous changes. Peer to peer lending companies like Prosper and Lending Club allow individuals to apply for unsecured personal loans up to $35,000. Individual investors can participate by investing as little as $25. The peer to peer lenders underwrite and service the loans. The investor’s decision is whether to invest and if so, how much? An individual investor has the same opportunity and the same information as a bank or specialty finance company.

Small business funding

A very profitable business controlled by specialty finance companies is buying trade receivables or factoring. Factoring is a $3 trillion dollar industry run by companies like CIT. What is it? Factoring is the sale of accounts receivable (invoices) to finance companies (factors). The finance company discounts what it pays the seller of the invoice. Example. Let’s say Joe’s Hammer Company sells hammers to Home Depot. Home Depot is Joe’s biggest customer but it’s slow to pay which is normal practice for large companies. Home Depot might not pay Joe for 120 days. That doesn’t help Joe pay his employees or electric bill so Joe will sell Home Depot’s invoice (the legal obligation to pay him) to a factor. Joe receives a discounted amount of the the invoice immediately and the finance company will receive the entire amount in 120 days. The factor determines the discount amount and Joe has to decide to “take it or leave it.” Sometimes the discount can be as much as 30%. It is a very profitable business for the factor because businesses will continually sell receivables to meet their cash flow needs. It’s also a great business because a company like Home Depot (the obligor) has very good credit and is legally responsible to pay the invoice. The odds of not receiving payment from Home Depot are very slim.

Technology has disrupted the factoring business as well. Recently an online marketplace has launched that allows companies to sell their trade receivables to self-directed investors. Allegheny Exchange operates an auction format exchange that allows companies like Joe’s Hammer Company to sell its invoices at a discount to individual investors. The exchange provides credit ratings of the invoice sellers and invoice obligors, validates the invoices being sold and facilitates the payment process between the invoice sellers, buyers and obligors. The sales of the invoices are full recourse to the sellers which means the sellers and obligors are legally responsible for paying the invoice buyers. The exchange is a turn-key solution for investors to participate in a market previously controlled by specialty finance companies. Technology not only allows individuals to participate in the asset class but greatly reduces the time and effort normally required to make investments. The investors only responsibilities are deciding which invoices to buy and how much they will pay for them. The appeal of trade receivable investing is apparent; short-term, high yielding assets with an invoice obligor legally responsible for payment and full recourse to the invoice seller. Because most trade receivables are paid within 60-120 days, they are a superior alternative to money markets and commercial paper to park cash between longer duration investments.

Matt Lutz, a Pittsburgh entrepreneur, has been utilizing a self-directed IRA for the past ten years. He was featured in the June 6, 2012 Forbes Magazine article, ‘Go Rogue With Your IRA.’ He has used his IRA to buy real estate, trade receivables, tax liens, performing and non-performing mortgages, and floor plan loans for car dealerships. He is currently the Managing Partner of Allegheny Exchange. Matt can be reached at mlutz@tarponbaycapital.com or by phone at 412-841-5009.

Investing in Growing Companies

September 4, 2014

Guest article by Evan Greenberg:

Over the past three decades, companies like Microsoft, Apple, Google, and Facebook have emerged, not to mention other powerhouses like Chipotle and Under Armour. They have replaced Chrysler, Woolworth’s, Data General, Digital Equipment, and many others in our dynamic economy. Many of these success stories are examples of why an alternative investment platform for accredited investors is important, as many of these companies were private investments before their IPOs, which came much later in their growth cycles. For example, one of my favorite concepts, Stratasys, a leader in 3D printing, has gone up 100-fold since 2002.

Typically, the primary way people were investing in growing companies was either through a direct investment or a venture capital fund, which could only be done inside of an IRA through an administrator like NuView. As defined by The Motley Fool, a hedge fund is described as “a pool of investment capital that a manager invests on shareholders’ behalf.” The crucial difference between a hedge fund and your run-of-the-mill mutual fund is the complete discretion it gives the fund manager to invest where and how he or she chooses. This allows hedge funds to hold any and all investment types, including alternative assets

Our economy has become more efficient, even in the last 15 years, by utilizing capital investors to quickly monetize and add value to emerging companies. Book value is no longer as important as balance sheet cash.

If I said to you that I expected mid-to-high single-digit returns for the next 10-15 years, then you would say that is a plausible idea. However, if I said that I expected the Dow Jones Industrial Average to hit 50,000 and the S&P 500 to hit 5,000 in the same time frame, you would probably call me crazy. Believe it or not, I forecast that both of those scenarios will occur before 2030.

While all good things come to an end, I’m still predicting this secular bull market will last for a long time. Dow 50,000 sounds like a spectacular number, but it is slightly above traditional market returns after 13 years of sideways action. This may not be a roaring bull to remember, but it won’t be one to forget, either.

Evan Greenberg is the Founder and Portfolio Manager for the LegendCap Opportunity Fund, which is an approved hedge fund on NuView’s platform that makes investments in emerging growth companies and allocates up to 20 percent of its assets to alternative investments such as private placements. Evan broadcasts a financial radio show in Phoenix and can be contacted at evan@legendcapfunds.com or (516) 662-0303.

Is Venture Investing Right for You?

July 1, 2014

Guest article by Blaire Martin:

Investors around the world are allocating a percent of their assets into early-stage companies in order to access opportunities for exceptional returns. “Angel investing is a legitimate part of an alternative asset class investment portfolio,” says David S. Rose, founder and chairman emeritus of New York Angels, in his new book, Angel Investing: The Gust Guide to Making Money and Having Fun Investing in Startups. “A rational person can be an investor and not a gambler.” In the book, Rose explains that more people can and should become angel investors and that a few big wins make up for all the losses.

A study by Wiltbank and Boeker estimates that the average return on venture investing by sophisticated angel groups is 27% IRR or 2.6 times the investment in about 3.5 years. Research shows that investing in multiple seed and startup companies is a key angel strategy. Many sources agree that a portfolio of 10-12 angel deals is adequate diversification to assure a reasonable ROI and that 6 or less angel investments is too risky. Investors can create a portfolio of investments by picking deals in FAN’s pipeline or by venture investing into a cross-collateralized fund.

Joining a sophisticated angel group is very helpful for investors interested in breaking into angel investing. Benefits often include: access to quality deal flow, collaborating with diverse investors and subject-matter experts, and assistance with due diligence, investment paperwork, and post-investment monitoring and support. Angel groups also encourage venture investing best practices and promote angel education from sources like the Angel Capital Association and the Angel Resource Institute.

There are many reasons that accredited investors write checks for angel investments. The possibility of getting in early with a company like WhatsApp excites investors looking for higher returns than possible with more traditional investments. Many investors also want to be significant in the lives of entrepreneurs with high potential ventures; angel investing is a way to incite opportunities with mentorship, networking connections, and capital. It may feel like philanthropy, but when done systematically through a sophisticated channel, it is a valid way to invest while giving back in your community, with an added benefit of upside potential.

The Florida Angel Nexus (FAN) is a statewide initiative to unite Florida’s investment community. FAN’s mission is to offer a disciplined and rewarding investment approach for Florida’s accredited investors. Investors are joining existing and newly formed angel chapters and funds across the state. These investors are exposed to exciting new technologies and startups; they enjoy meeting to discuss these investment opportunities and evolving markets. Membership is very diverse, from realtors to serial entrepreneurs, doctors to accountants. All accredited investors are welcome.

The UCF Center for Innovation and Entrepreneurship provided the leadership and resources to research and launch FAN. Key supporters include: UCF, Florida High Tech Corridor, Florida Institute of Commercialization of Public Research, Gainesville Chamber of Commerce, Gray Robinson, and BioFlorida.

Blaire is the founder of Florida Angel Nexus. Interested parties can contact FAN for more information at www.FloridaAngelNexus.com or blaire@FloridaAngelNexus.com.

New Case Answers Important Questions About IRA LLCs

February 13, 2014

Guest article by Mat Sorensen:

Can my IRA own substantially all of the ownership of an LLC? Can my IRA/LLC pay a salary to me for serving as the manager of the IRA/LLC? The U.S. Tax Court issued an opinion in the case of Ellis v. Commissioner, T.C. Memo 2013-245 and answered both of these questions.

In Ellis, the Tax Court resolved two questions posed by the IRS. First, did Mr. Ellis engage in a prohibited transaction when his IRA acquired 98% of the membership interest in CST, LLC? And second, did Mr. Ellis engage in a prohibited transaction when CST, LLC (owned 98% by his IRA) paid him compensation for serving as the manager?

As to the first question, the Tax Court held that Mr. Ellis’ IRA did NOT engage in a prohibited transaction when it acquired 98% of the ownership of a newly established LLC. The other 2% was owned by an unrelated person who was not part of the case and whose ownership did not have an impact on the decision. The IRS contended that a prohibited transaction occurred when the IRA bought ownership of CST, LLC. The Court disagreed, however, and held that the IRA’s purchase of the initial membership interest of the LLC was NOT a prohibited transaction. The Court stated that the IRA’s purchase of membership interest in a new LLC is analogous to prior holdings of the Court whereby the Court held that an IRA does not engage in a prohibited transaction when it acquires the initial shares of a new corporation. Similarly, the court held that a new LLC is not a disqualified person to an IRA under the prohibited transaction rules and as a result an IRA may invest and own the ownership of the LLC. IRC § 4975(e)(2)(G), Swanson V. Commissioner, 106 T.C. 76, 88 (1996). Consequently, the Court’s ruling means that it is NOT a prohibited transaction for an IRA to acquire substantially all or all of the ownership of a new LLC.

As to the second question, the Tax Court held that it was a prohibited transaction for the LLC owned substantially by Mr. Ellis’ IRA to pay compensation to Mr. Ellis personally. The court reasoned that, “In causing CST [the IRA/LLC] to pay him [IRA owner] compensation, Mr. Ellis engaged in the transfer of plan income or assets for his own benefit in violation of section 4975 (c)(1)(d).” This type of prohibited transaction is often times referred to as a self dealing prohibited transaction and occurs when the IRA owner personally benefits from his IRA’s investments. The Court looked to the operating agreement of the LLC which authorized payment to Mr. Ellis for serving as the general manager and also the actual records of the LLC which showed the payments to Mr. Ellis. When using an IRA/LLC, one of the many important clauses in the operating agreement is one which restricts compensation to the IRA owner or any other disqualified person (e.g. IRA owner’s spouse or kids). Also, the actual payment and transaction records of the IRA/LLC will be analyzed so it is important that both the LLC documents and the actual payment records do not allow for or result in payment from the IRA/LLC to disqualified person (e.g. IRA owner).

It is also important to note that the Tax Court rejected Mr. Ellis’ argument that the payments were exempt from the prohibited transaction rules under section 4975 (d)(10). Section (d)(10) provides an exemption to the prohibited transaction rules for payments from an IRA to a disqualified person [e.g. IRA owner] for services rendered to manage the IRA. The Tax Court rejected this argument stating that the payments from the IRA/LLC were not for management of the IRA but for management of the IRA/LLC and its business activities. In this case, the IRA owner was actively involved as the general manager of the IRA/LLC which LLC bought and sold cars. As a result, the Court held that the payments were not exempt and constituted a prohibited transaction.

I was happy to read this case and find the Court’s conclusions because it matches the same opinion and advice we have been giving clients regarding IRA/LLCs for nearly ten years: that a newly established LLC owned by an IRA does not constitute a prohibited transaction but the IRA/LLC cannot pay the IRA owner (or any other disqualified person) compensation for managing the IRA/LLC.

Mat Sorensen is a lawyer and the author of The Self Directed IRA Handbook: An Authoritative Guide for Self Directed IRA Investors and Their Advisors. He is a partner with KKOS Lawyers in its Phoenix office and assists clients nationwide on self directed IRA matters. He can be reached at mat@kkoslawyers.com or by phone at 602-761-9798. His website is www.sdirahandbook.com

A Difference of Opinions – JOBS Act Updates

August 7, 2013

In this edition of A Difference of Opinions, two attorneys sound off about the SEC adoption of a mandate in the JOBS Act of 2012 that permits general solicitation in private securities offerings. We reached out to two attorneys with different backgrounds just to get a better idea of what this update might hold for the future of promotional activities among investors and those wishing to raise money.

And You Thought Law Firm Advertising Was Bad?
By: Wayne Patton, Esq, an asset protection, business, finance and estate planning attorney. Wayne’s firm is based in Miami, Florida, and he can be contacted through his website.

In March of 2012 the Jumpstart Our Business Startups Act (the “JOBS Act”) became law. The purpose of the legislation simplifies the process of business fundraising. The law specifically touches investment firms like hedge funds and private equity funds, which have traditionally struggled to “get the word out” under the previous stifling rules that prohibit “general solicitation” under the Securities Act of 1933.

Though it took more than a year for the SEC to approve rules implementing the JOBS Act, we now officially have a framework on which to rely. There are a few things you should know before you start urging clients to advertise openly.

First, while general advertising and solicitation is permitted under the new rules, the “accredited investor” rules regarding unregistered security offerings are still in place.

Also, with the permission to generally solicit comes more responsibility. Specifically, the burden of proving “accredited investor” status has shifted. Under the new rules, investment firms need to ensure that investors are actually accredited.

The next logical question is “Just how inundated will we be with fund advertising?” You thought lawyers were bad. Just wait…

Adoption of New Rule 506(c): General Solicitation in Regulation D Offerings
By: Sara Hanks, co-founder and CEO of CrowdCheck, is an attorney with over 30 years of experience in the corporate and securities field.

On July 10 the SEC complied with a mandate in the JOBS Act of 2012 to permit “general solicitation” in private securities offerings. In doing so, the SEC created an entirely new type of securities offering not required to be registered under the Securities Act of 1933.

The SEC adopted amendments to Regulation D under the Securities Act to add new Rule 506(c). Rule 506(c) offerings are technically private placements, made only to “accredited” (rich) investors. In the past this has meant not just that accredited investors only could buy the securities, but also that the issuer could offer them to accredited investors only.

Under the new rule, small companies and private investment funds and their intermediaries will be able to use “general solicitation” to reach accredited investors, which means they may advertise or publicize an offering on television, in newspapers, and most importantly over the internet. They may talk about the offering on talk shows and webinars, and they may promote the offering on social media.

This is a big change. But companies planning to take advantage of the ability to make public solicitations (and their advisers) should bear in mind that something that hasn’t changed is the application of the securities anti-fraud laws to all statements made in connection with the sale of securities. And for that reason, this new type of offering might not be as game-changing as some think.

Proponents of the new rule believe that it will increase transparency, make it easier for small companies to raise capital and decrease companies’ administrative costs. Opponents worry that, in the words of SEC Commissioner Aguilar, removal of the prohibition on general solicitation would be “a boon to boiler room operators, Ponzi schemers, bucket shops, and garden variety fraudsters, by enabling them to cast a wider net, and making securities law enforcement much more difficult.”

Awareness of fraudulent promotional activities means that prospective issuers and their advisers will have to be very careful about the accuracy and completeness of any statements they make. Will the rule change mean that we see hedge funds advertising on late-night TV or Twitter campaigns for investments in startups? The impact of the new rule is likely to be more limited in that respect than some have predicted. Public registered mutual funds do advertise, but those advertisements tend to be staid and contain lots of “fine print” disclaimers prescribed by law; private funds will likely be just as constrained. Broker-dealers putting together Regulation D deals are already subject to FINRA rules with respect to their advertising and social media use, and these requirements have not changed. The anti-fraud laws discussed above should have a tempering effect on any overly-exuberant publicity attempts in either paid or social media.

And the SEC will be watching. The SEC has established a “Rule 506(c) Work Plan” involving staff from all across the SEC, who will monitor the new Rule 506(c) market for fraud and compliance and to coordinate with state regulators.

The effective date for the new rule is September 23, 2013. Rule 506(c) offerings will only be legal after that effective date.

There’s an App for That…Simplify Your Business and Your Life with Google Drive

April 23, 2013

Guest article by Tom Jelneck:

About two years ago, my company had a problem. We had way too many digital assets in way too many places. Where’s that Photoshop file? Where did the press release draft get stored? This huge waste of time trying to hunt down digital files is not only a headache, but costs us money. As our businesses create more and more digital files, the need for a one stop file repository is becoming mission critical in order to keep efficiency at peak levels. If you’re not crazy about housing power-sucking, maintenance hungry servers to store your data, keep reading.

Enter Google. The search engine giant Google has developed some amazing tools that are making all of our lives much more efficient and manageable. Google has created a platform where you can create, collaborate, share, print and alter documents, spreadsheets, presentations and more through it’s cloud service Google Drive. All docs, email, calendars, etc., can be accessed from your desktop, your smartphone, your tablet, etc., which means you’ll never need to call your secretary back at the office to have them pull a file. All of your files, emails, appointments, to-do lists, etc., all at your fingertips, 24/7.

Key Features:

Ability to upload and store multiple file formats in your Drive (you can upload Word docs, PDFs, Excel spreadsheets, etc., and store them in Google Drive).
Ability to manage who in your organization has access to what.
Ability to manage how much data space users in your organization are using.
Ability to collaborate and share documents in real time.
Ability to sync online Drive with your local PC or Mac.

The Bottom Line:

If you need to streamline and simplify your business, consider Google Drive. It’s free, easy to use, robust and, best of all, doesn’t require hiring an expensive IT pro to keep it running smoothly.

Setting up Google Drive is simple, and it offers solid tech support to get you up and running. Google continues to expand with products and improvements on integral tools (like Search and Maps), and it will continue to innovate and create making it a robust technology partner for any business.

For more technology and Internet marketing tips, visit http://tomjelneck.com.

Is Obama Capping IRAs?

April 12, 2013

It happens to me almost every presentation. Someone from the audience raises their hand during a seminar on self-directed IRAs and asks, “What is the likelihood that the government is going to take away my IRA?” Or, “will my Roth IRA indeed never be taxed again, or will Congress change their mind later when they are desperate for more revenue?”

Until this past week, I dismissed those conjectures as needless concerns from conspiracy theorists. Until the headline “Obama wants to put $3 Million Cap on IRAs” was found on the front page of the local paper. Maybe there is something going on that we need to pay attention to…

Now, of course, the political approach of making such a drastic move is first to reassure everyone that this will only target the rich, not you or I. And there is a slight inference that no one can gather such a large IRA together without some unfair advantage and extreme good fortune. In the article, recently failed GOP Presidential candidate Mitt Romney’s $100M IRA was trumpeted as the perfect example of how a large IRA is created based on insider knowledge and understanding tax law nuances.

Regardless, the rest of us in much lower tax brackets should be a bit uneasy. IRAs were created to help individuals have a shot at creating a retirement for themselves that industry and government had no stomach or ability to provide. Now over 47 million households have them, with almost $5 Trillion saved for retirement. It’s not unexpected that the government is eyeing those accounts with a great deal of interest, impatient for the tax revenues that will only come upon personal distribution of those largely pre-tax assets.

But wait, this won’t affect me – or anyone I’m likely to know. $3M is a huge IRA and not likely to be amassed by an ordinary person. Not true. For example, a person can, through a SEP IRA, contribute up to $51,000 annually. Through consistent savings and wise investing – many choosing a self-directed IRA, it is not impossible or even improbable of achieving a large balance in your IRA. We certainly have clients that would be taxed under this potential plan.

The concept of charging a tax on an IRA account which was created in the first place to provide a tax shelter to encourage savings is flawed policy. A bad idea is equally as bad regardless of whether or not it affects you or I.

Balancing the budget is something that both sides of the political aisle proclaim to be important for the future of our country. Doing it by taking it directly from retirement plans that were pledged never to be taxed is wrong.

Who knows, are Roth IRAs next?

Glen Mather is President of NuView IRA, Inc., a leading self-directed IRA administrator in Orlando, Florida. He can be contacted at 407-367-3472 or gmather@nuviewira.com.

As a Small Business Owner, Don’t Forget About Your Own Retirement Plan!

March 6, 2013

According to a recent American College study, 40% of small business owners have no retirement savings or pension plan. Even more, roughly 75% of small business owners have no written plan for how to fund their retirement.

As a small business owner, you likely realize the need to save for retirement, but may have put planning for it on the back burner for now. Many business owners posses the admirable quality of taking care of others before themselves. While this is noble, don’t forget to take care of yourself along the way as well. Jeff Manley, Executive Vice President of Cadence Bank put it well when he said, “Business owners shoulder the most responsibility for their businesses, yet often forget to pay themselves first.”

So, how much should you save for retirement and what IRA plans are available for small business owners? The general rule of thumb is to save between 10 and 15 percent of annual income in retirement savings vehicles. A great option is a self-directed IRA – a tax-deferred retirement account that allows creative, non-traditional investing such as real estate, notes, and private companies. For an in-depth look at more retirement plans available for small business owners, check out our blog post entitled “I Own a Small Business or am Self-Employed – What are My Retirement Plan Options?“.

Saving for retirement doesn’t have to be hard for the small business owner. Just remember to take care of yourself, as well as your employees. The right retirement plan will depend on your strategies and growth goals for your small business. As always, contact our Florida self-directed IRA administration company to learn more about the many ways you can invest in your retirement. Give us a call today at 407-367-3472!