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    Henry Yoshida
    Henry Yoshida

    Co-Founder & CEO

    It’s no secret that crowdfunding is popular.

    There are 45 crowdfunding portals registered with the Financial Industry Regulatory Authority including EnrichHER Funding, NetCapital Funding Portal Inc., Razitall Inc., etc. One crowdfunding portal I’ve successfully used is Republic, which primarily focuses on early-stage equity investments in private startups and crypto companies issuing security tokens.

    I invested in a startup that is digitizing, streamlining and automating the process of setting up a will or trust. Since only a small percentage of people know they can use their IRAs to invest in alternatives, I thought I’d use my crowdfunding experience as a chance to provide education on one of the alternatives investors can consider. Let’s dive into the basics about crowdfunding using a self-directed retirement account.

     

    The Don’ts

    • Don't invest in an LLC company without looking at their Form F
    • Don't purchase fractional shares in paintings, coins, antiques/art, or fine wine and consumables
    Self-directed retirement investors realize the same benefits of crowdfunding whether they invest using an IRA or a cash account. Some self-directed investors actually own an LLC and are investing through an LLC mechanism, which makes it easy for crowdfunding platforms to accept investments once you’ve registered on their sites.

    There is one area of concern, however. Many emerging companies register as LLCs instead of as traditional C corporations, and investing in an LLC through your IRA can be problematic. Those investing with self-directed retirement funds should pay particular attention to a company’s Form F on crowdfunding sites to make sure potential investments are in traditional C-corps rather than LLCs. That is about the only restriction outside of normal IRA investment restrictions.

    In addition, certain crowdfunding opportunities are considered prohibited transactions by the IRS for self-directed individual retirement account investors. These include purchasing fractional shares in:

    • Rare paintings or gold coins
    • Antiques or art
    • Fine wines or other consumables

    A few of the many crowdfunding options that are in tune with IRS guidelines include startup equity, peer-to-peer loans, syndicated real estate offerings, and fractional shares in self-storage facilities, timberland or similar commodities.

     

    The Do’s

    • Do diversify in non-correlated assets
    • Do invest money you can live without
    The diversification gained from spreading investments around via crowdfunding opportunities is useful to crafting a 21st century diversified retirement portfolio. Many of these alternative asset classes aren’t correlated to the stock market, so when public markets sink, your investments still could potentially float.

    And some of these alternative asset classes are hard to access unless you’re able to meet minimum investment thresholds. But with crowdfunding, you can invest in small bites and gain exposure that you might not be able to do otherwise. Often times, you can invest as little as $100, though from what I’ve seen, the average minimum is around $250.

    Retirement investors can build a diversified portfolio of non-correlated assets and don’t need to be accredited investors or have a million dollars to get started. And since you are investing through a tax-sheltered IRA, if you hit a home run and get 20% or 30% return on your investment, you won’t have to pay capital gains tax since all profits stay within your IRA, where you can re-invest into other companies.

     

    The Big Picture

    Crowdfunding investments made through an IRA work the same as if they were made through cash accounts. However, when you invest from your IRA, you have to be very careful not to receive any type of benefit prior to retirement from your investments. With a lot of crowdfunding sites, when you look at the individual offers, there’s an investment scale. If you reach certain investment thresholds, you get some type of perk, and these benefits can have real monetary value. You should refuse those benefits because then you would be receiving a benefit from your IRA and you don’t want to step across that line and be self-dealing with your own IRA account.

    Topics: Alternative investing, Diversification, Crowdfunding

    Published on May 08 2019