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Private Placements: Not the Time or Place for Careless Due Diligence

To say that the market for private placement investments is significant is a bit of an understatement. In 2019, Reg D private placement offerings alone raised more than $1.5 trillion in capital to fuel the growth of private businesses, compared to the $1.2 trillion raised through registered public offerings, according to data compiled by the SEC.

Private placement offerings provide private companies with the ability to raise capital by selling debt or equity securities to a limited pool of investors. In other words, private placements are not publicly traded assets. This means that Self-Directed IRA account owners have the opportunity invest their qualified funds in an existing or startup business, a real estate venture, an investment partnership, mineral rights, and many other areas of opportunity. There are two primary ways that your Self-Directed IRA can invest in private placements – through a fund or directly into a company.

While the prospect of giving the next financial tech startup the boost they need to be successful and, in turn, line the pockets of your retirement savings, there are a few important aspects of these types of investments you should take into consideration.

Private Placements:

  • Have minimal regulatory requirements and standards - they are not required to be registered with the SEC, provide a prospectus, undergo financial audits, or disclose detailed financial information.
  • Are often comprised of ZERO collateral, which means you have the potential to lose your entire investment.
  • Are often illiquid. Unless the offering provides a means for you to liquidate your interest, you may be required to retain the investment for an indefinite period of time.

Based on the factors listed above, you can see that investors are subject to the expertise, financial integrity, and good faith of the company. You are investing in the people of the company. This means that thorough research and due diligence should never be taken lightly; especially when you choose to invest the money that is supposed to last you through your golden years.

If you have never engaged in this type of investment, you may not know what steps you should take to perform in depth research and due diligence on a company. Provided below is a checklist to help you get started.

Disqualified Individuals

Before you even consider an investment offering, you should determine if you may be engaging your IRA account in a prohibited transaction. For example, if the offering is with an existing entity, total ownership by disqualified individuals (including the IRA owner) cannot exceed 50%. Also, the IRA owner cannot receive personal compensation for the business owned by their IRA.

Engaging in a prohibited transaction, even if unintentional, can cause your IRA to lose its qualified tax-protected status and be subject to tax consequences and penalties.

Regulatory Notices

Now it’s time to hop on your computer to search the Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) websites to ensure that the company and its principles do not have any regulatory red flags, whether they are past or current. If something shows-up on their track record, you should request that they clarify the situation. If they are unable to provide you with a reasonable explanation, you may want to look elsewhere to invest your money.


The company should provide prospective investors with either a private placement memorandum and/or their operating agreement and a subscription agreement. Reviewing the terms and conditions disclosed in these documents is crucial to understanding the company management and operations, and the terms of what you are investing in.

  • Private Placement Memorandum: A legal document that states the objectives, terms and risks of the offering and should include items like financial statements, biographies of management, business operation descriptions, etc.
  • Operating Agreement: This document is used by LLCs to outline the financial and functional decisions such as regulations, rules, and provisions of the business.
  • Subscription Agreement: This document defines the terms and risks of the investment to the investor and acts as the purchasing agreement of the security.


The accessibility of a company, or the lack thereof, can speak volumes for how their operation is run and help you gauge their priorities regarding their investors. Below are a few questions to help you determine if a company will be open to communication and transparency:

  • Is it easy to contact the company, or are you placed on hold for hours before you can speak to someone?
  • Are they willing or able to give you their time for questions, or will they only speak with you for 10-to-30-minute increments?
  • Are they open to in-person visits/meetings?
  • Do they provide educational content or information about their business?
  • Do they answer the tough questions, or do they dance around the topic of risks?
  • Do they state any guarantees regarding the investment? If they do, you should be wary because no investment is guaranteed.
  • Do they provide updates to investors on a regular basis?

While visiting the company in-person may not be the most convenient method, it can provide you with insight on a company that you cannot reach the phone or through email. Did they introduce you to the entire team? What is the overall morale of the employees of the company? Do they look organized and established? Is their primary office located in a temporary WeWork building?

Business Strategy

A company’s business strategy is going to vary, but there are certain components that you can analyze across the board. Here are a few questions to learn more about their strategy (if applicable):

  • What is their goal as a company? To simply grow as a company? To grow and then sell as quickly as possible or down the road?
  • Do they have skin in the game? Have they invested their own money and assets to make them less likely to walk away if times become difficult?
  • What are the backgrounds of the people running the company? Do they have skeletons in their closet that you can find with a quick search online? Does their prior experience or education equip them to be successful with their business venture?
  • What type of technology are they using to help the company grow and/or be successful?
  • Do they have competition in their industry? How are they going to outpace them?

Getting the answers to these questions can be important to understanding if the scope of their strategy and the team they have assembled will lead the company to be successful.


As a Self-Directed IRA investor, it is your sole responsibility to perform research, due diligence, and gauge your tolerance for risk before engaging in any investment. As a Self-Directed IRA custodian, Preferred Trust Company is not licensed to provide any advice on specific investments. However, as an alternative investment advocate for retirement savers, we provide the level of service and security clients need to successfully participate in their investment opportunities.