Investing in Crowdfunding with a Self-Directed IRA: What Happens if the Company Goes Public?

Crowdfunding has revolutionized how individuals can access early-stage investments in startups and innovative projects. With a self-directed IRA (SD IRA), investors can take advantage of these opportunities while benefiting from the tax advantages that IRAs offer. However, as some of these companies look towards an Initial Public Offering (IPO), it’s important to understand what this means for your investment and how it will impact the custody of those assets.

The Power of Crowdfunding with a Self-Directed IRA

Crowdfunding platforms have democratized investment opportunities by allowing everyday investors to back businesses, real estate projects, and startups, which traditionally were available only to venture capitalists or accredited investors. With a self-directed IRA, these investments are even more accessible, enabling you to diversify your retirement portfolio in non-traditional assets like private equity, startups, and other alternative investments.

A self-directed IRA gives you control over a broader range of investment options compared to traditional IRAs, which are usually limited to stocks, bonds, and mutual funds. Through SD IRAs, you can invest in private companies at early stages, offering the potential for significant returns if the company grows and goes public.

What Happens if the Company IPOs?

While many startups and crowdfunding ventures remain private, some companies eventually grow to the point where they file for an IPO. An IPO can be a major turning point, as it opens the company’s shares to the public and provides liquidity for early investors. If you hold crowdfunding investments in a self-directed IRA, the transition from private to public can have significant implications for the custody of your assets.

Self-directed IRAs are typically used to invest in private, non-traded assets. However, once a company goes public, your crowdfunding investment will no longer qualify as a private placement. This change will trigger the need for you to transfer your IRA-held investment from a specialized SD IRA custodian to a traditional custodian, often referred to as a “Big Box” custodian.

Why Do You Need to Move Your Investment?

When a company transitions from private to public status through an IPO, the way its shares are traded also changes. Publicly traded shares are managed on public exchanges, such as the New York Stock Exchange (NYSE) or NASDAQ. Custodians that specialize in self-directed IRAs, such as Preferred Trust, are typically not authorized to hold publicly traded assets. Therefore, you’ll need to transfer your IRA investment to a custodian like Charles Schwab or Fidelity, which can handle publicly traded securities.

This transfer is a standard requirement to ensure that your investment remains compliant with IRS regulations governing IRAs. The good news is that this process can usually be done without triggering taxes or penalties, as long as the funds remain within your IRA and the transfer is handled correctly.

What to Expect During the Transition

If your crowdfunding investment is part of a company that is preparing for an IPO, it’s important to be proactive in managing the transition. Once the IPO is finalized, you’ll likely receive communication from your SD IRA custodian outlining the steps you’ll need to take to transfer your investment to a Big Box custodian.

Here are the steps you can generally expect:

1. Identify a Traditional Custodian: Research and select a custodian like Charles Schwab or Fidelity that is equipped to manage public equities within your IRA.
2. Coordinate with Both Custodians: Your self-directed IRA custodian and the traditional custodian will need to communicate to ensure a seamless transfer of your investment. Typically, this involves liquidating the private shares within your SD IRA and transferring the cash or the equivalent public shares to the new custodian.
3. Transfer the Assets: The new custodian will receive the public shares of the company and manage them within your IRA, adhering to the same tax-deferred or tax-free status depending on the type of IRA (Traditional or Roth).
4. Monitor Your Investment: Once the shares are transferred to a traditional custodian, you will be able to view and manage your investment like any other public equity within your IRA.

Key Considerations for Crowdfunding Investors

If you’re investing in a crowdfunding company with your SD IRA, it’s essential to plan for the possibility of an IPO from the start. Here are some key points to keep in mind:

• Custodian Fees and Services: SD IRA custodians may have different fee structures than Big Box custodians. Be sure to understand the costs involved when transferring and managing your public shares.
• Liquidity Events: An IPO can be an exciting liquidity event, but it also comes with new considerations for your investment strategy. Public shares may be subject to lock-up periods, during which you cannot sell them immediately.
• Diversification Strategy: While an IPO can bring potential rewards, it’s important not to put all your retirement eggs in one basket. Diversifying your investments across different asset classes—both private and public—can help mitigate risk.

Investing in crowdfunding companies through a self-directed IRA offers unique opportunities to back innovative ventures early on. However, if the company eventually goes public, you’ll need to work with both your SD IRA and a traditional custodian to ensure a smooth transition. By planning ahead and understanding the process, you can continue to enjoy the benefits of your investment, whether the company remains private or makes its debut on the public market.

With the right approach, your crowdfunding investment can grow alongside your retirement savings, providing long-term financial security and the satisfaction of supporting innovative businesses.

Interested in learning more about investing in crowdfunding with a self-directed IRA? Contact us to see how Preferred Trust can help diversify your retirement portfolio with crowdfunding investments.

PS. In our newest episode of the Preferred Way, Chris Trembly (Preferred Trust) interviews Mason Weiler (Connect Invest) about their crowdfunding investment. Click HERE to listen!