New rule can increase investment opportunities for Self-Directed IRA investors, both accredited and non-accredited.
- Can help companies raise capital
- Increases exemptions
- May bolster private markets
SEC Rule Changes
On Monday, November 2, 2020, the U.S. Securities and Exchange Commission voted to adopt amendments that will ease capital formation and increase opportunities for investors through the expansion of access to capital for small and medium sized business across the United States.
In an effort to make raising capital easier for companies without needing them to go public, the United States Securities and Exchange Commission enacted a series of measures to allow small and medium companies more opportunities. Instead of the previous six month limitation, the new rules significantly expand private-market access to investors including being allowed to make exempt offerings within as little as 30 days of one another.
In August, 2020, the US SEC approved an expansion of “accredited investors” to include holders of an entry-level stockbroker’s license, knowledgeable employees of nonpublic firms and more, which may further open the door by broadening the category to holders of other credentials. Until that time, investors could be considered accredited only if they had $1 million in net assets, or at least $200,000 in annual income. With the expansion, the ranks will likely continue to grow as more and more seek to become accredited.
The US SEC rules can increase investment opportunities for Self-Directed IRA investors by facilitating capital formation and allowing greater reach for small and medium size companies. The new regulations should reduce regulatory costs and burdens for those companies, by making exemptions more efficient and easier to navigate, making the number of exceptions Congress and regulators have crafted over the years into a smoother system overall.
There are critics of the changes, not limited to the SEC’s two Democratic commissioners and consumer advocates, who charge that the changes will undermine the nation’s public markets for stocks and bonds, which have already been dwarfed by private markets. One SEC estimate indicates that $2.7 trillion was raised in exempt offerings last year, versus $1.2 trillion in public offerings.
Concerns include, but are not limited to that issue that the new rule does not put consumer protections into place while it significantly expands the private-market access to investors. This means that more transactions will be occurring, without supervisory control over them, leading to what could be potential problems.
Increase Investment Opportunities for Self-Directed IRA Investors
The new rule also increases the limits of the amount of money that smaller companies can raise via exemptions. Now, startups will be able to collect up to $5 million through online crowdfunding initiatives, up from the $1.07 million currently allowed by law. Crowdfunding participants and initiatives will be able to invest the greater of their annual income or net worth, rather than the lesser of the two. Companies also will be allowed to gauge investor interest without running afoul of restrictions on advertising private offerings to non-accredited investors.
There are some concerns, not least of which is that there is a greater potential for losses as there is a greater amount of investment made into companies. However, this should enable those companies that want to remain private, or owned by fewer investors, a greater chance to retain control.
Crowdsourcing funds for investment purposes is not a new phenomenon, but the scope and reach of the internet and modern communications make it a greater opportunity than ever before. Traditionally, entrepreneurs and small businesses in need of capital would turn to banks and venture capital firms, a method that takes a lot of time and money to present the business plan, market research, etc. Also, there is no guarantee of success.
Today, crowdfunding platforms not only provide a vast resource of investors to fund their business, but facilitates entrepreneurs in finding the right investors. It also helps the investor find the right business venture to fund. Opportunities can launch online, through Kickstarter or other services of that sort, and in some ways that can be even more beneficial.
The most tax-advantageous method to purchase investments is with the use of retirement funds. A Self-Directed IRA or Solo 401(k) for self-employed or small business owners allows you to generate tax-deferred or tax-free gains on your investments. Additionally, the IRS only states the types of transactions you cannot make with your retirement account, which are very few.
Crowdfunding is a legal and lucrative investment when using a self-directed retirement plan.