Investing Spotlight: Private Placements

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Investing in a private placement, such as a private business, hedge fund, or investment company can be an exciting investment with handsome returns. 

A private placement (also known as a non-public offering)  is a way for a company  or organization to raise capital. Private placement funding is different from investing in a public stock that is raising money. Typically, only a small number of investors are chosen. (Source)

Because of the risk involved in private placement lending, these opportunities may be limited to accredited investors.

What is an Accredited Investor?

An accredited investor is defined as an individual who has a net worth of $1MM, not counting your home value. You may also reach accredited investor status by earning income that exceeds $200,000 (or $300,000 together with a spouse) for the past two consecutive years. (Source)

Generally speaking, accredited investors are allowed to participate in private offerings because they are deemed to have the sophistication to understand the risks of the investment, and also to not be financially devastated should the investment incur a total loss.

Once you establish your Solo 401k plan and fund the plan via rollovers or contributions, you are ready to begin! 

Review the investment offering documents. Depending on the structure of the investment entity (e.g. C-corporation, Limited Partnership, LLC, etc), the offering documents may include the following:

  • Private Placement Memorandum
  • Limited Partnership Agreement
  • Subscription Agreement (may also be a Stock Purchase Agreement)
  • Investor Deck
  • Accredited Investor letter (typically your attorney and/or CPA will need to verify your assets proving you meet accredited investor status)
  • Certificate of Good Standing from the Secretary of State where the entity was formed
  • Investor Questionnaire – this is typically to fulfill anti-money laundering and Know Your Customer banking and SEC regulations to ensure your money is truly yours and that you’re able to spend it as you see fit

How does the Solo 401k Become Accredited?

If accredited investor status is required to complete the private placement investment, your Solo 401k may still qualify. Generally speaking, even if the Solo 401k has assets totaling less than $1,000,000 – you may still be able to make the investment.

Therefore, if the Solo 401k trustee (you) meets accredited investor status either by the net worth or income requirement, your Solo 401k trust is considered accredited as well.

Private Placement Investment Fast Facts

  • The Solo 401k trust is the investor, not you as the trustee
  • The Solo 401k trust EIN should be listed on all investor subscription documents
  • You as the 401k trustee may sign the investor documents on behalf of the 401k trust (e.g. John Smith, Trustee of Smith Consulting Trust
  • Once your investor documents have been approved, wire the funds to complete the investment from your Solo 401k trust bank account
  • Collect any dividends or disbursements into your Solo 401k trust bank account (not your personal or business bank account)
  • As the Solo 401k trustee, you are the fiduciary of the trust. The words fiduciary and trustee may be used interchangeably with respect to completing the investment

Reporting Requirements for a 401k Trust in a Private Placement

The fund is required to issue certain forms to investors to satisfy their reporting. These forms may include a 1099-R or K-1 (depending on the structure of the investment)

Your Solo 401k trust is a tax-deferred entity and doesn’t need to file a tax return. If the investment was done properly in the name of the Solo 401k trust, using the 401k trust tax ID number, the IRS will be able to identify the trust as a tax-deferred entity and no reportin of the forms is required.

What About Crowd Funding Investments for Non-Accredited Investors?

With the passage of the JOBS Act in May of 2016, some private placement offerings opened up to non-accredited investors. These investments may be crowdfunding platforms such as private lending, REITs (real estate investment trusts) and more. Generally speaking, you’ll follow the same best practices for private investments open to non-accredited investors as you would for accredited investors. 

Title the investment in the name of your Solo 401k trust, and use your Solo 401k trust tax ID number. Sign the investment offering documents as the trustee of the 401k plan. Initiate the investment using funds from your Solo 401k trust bank account and receive any dividends, gains, or disbursements right back into your Solo 401k trust bank account.

Disclaimer: Investing inherently involves risk. Nabers Group and its affiliates, subsidiaries or partners are not investment advisors and we do not offer investment advice. Always complete your own due diligence before executing any investment and check with your CPA, legal counsel or tax advisor before executing investments using retirement funds.

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