You can own just about any investment in a self-directed IRA. The Internal Revenue Service excludes only life insurance policies and collectibles, although you can hold certain precious metals. You can scoop up private company stock shares in your IRA, but you might need to meet certain wealth or income requirements.
Stock shares that trade on an exchange have been registered with the U.S. Securities and Exchange Commission. The issuer sells these shares through an initial public offering (IPO). However, companies can also sell unregistered stock privately using procedures described in SEC Regulation D. The sale is a “private placement,” and the rules require that some or all the buyers be “accredited investors.” If you want your IRA to snap up some of these shares, check with the issuer to see if it can sell them to you. A private placement broker can help you locate private shares for purchase.
Accredited Investor Definition
The SEC defines an accredited investor to be an individual or organization that meets certain requirements. To be accredited, an IRA owner must have a net worth of $1 million, excluding the value of a main home. You can include your spouse’s net worth. Alternatively, you just might be accredited if you earned at least $200,000 in each of the previous two years and expect the same income level in the current year. If you file a joint return, the income hurdle for you and your spouse is $300,000 a year. You’re also accredited if you're a senior executive of the company selling the shares — but rules against self-dealing might prohibit your IRA from buying these shares.
Your IRA can buy private shares through three different Regulation D rules. Rule 504 allows a company to peddle up to $1 million a year in private securities. All buyers must be accredited investors. Rule 505 allows issuers to sell up to $5 million a year in private securities to any number of accredited investors and up to 35 other investors. Under Rule 506, the number of accredited investors and the amount of securities sold are unlimited. The 35 other investors must be “sophisticated,” which is SEC-speak for knowing the risks.
Private shares are restricted, meaning that you can’t sell them until you have the restriction lifted. Under SEC Rule 144, you can do just that by holding the securities for six months. After the holding period, ask the issuer’s transfer agent to reissue the shares with the restrictive language removed from the back of the certificates. You can then freely trade the shares. You also might be rewarded big-time for your efforts, because the unrestricted version of the shares are, by definition, hard to find. This might help drive up the price.
Based in Greenville SC, Eric Bank has been writing business-related articles since 1985. He holds an M.B.A. from New York University and an M.S. in finance from DePaul University. You can see samples of his work at ericbank.com.