Crowdfunding is very popular. The Financial Industry Regulatory Authority has 45 registered crowdfunding portals, including EnrichHER Funding, NetCapital Funding Portal Inc., Razitall Inc., etc.
I have successfully invested using Republic.co's crowdfunding platform. They primarily focus 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. This blog post is educational on how investors can invest in businesses that are raising capital through crowdfunding.
Let’s dive into the basics of crowdfunding using a self-directed retirement account.
- Don't invest in an LLC company without looking at their Form F
- Don't purchase fractional shares in paintings, coins, antiques/art, or 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 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 reasonable IRA investment restrictions.
Besides, specific 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
- Wines or other consumables
- Do diversify in non-correlated assets
- Make investments with money you can live without
The diversification gained from spreading investments around via crowdfunding opportunities is useful for crafting a 21st century diversified retirement portfolio.Many alternative asset classes do not correlate to the stock market. So when public markets sink, your investments still could potentially float.
Some of these alternative asset classes are hard to access unless you can meet minimum investment thresholds. crowdfunding, you can invest in small bites and gain exposure that you might not be able to do otherwise. Often, you can invest as little as $100, though from what I have 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. Since you are investing through a tax-sheltered IRA, if you hit a home run and get a 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 investments made through cash accounts. However, when you invest from your IRA, you have to be very careful not to receive any benefit before 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 perk, and these benefits can have a real monetary value. It would be best if you refused 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.