Jeff Nabers’ Self Directed IRA & Solo 401(k) Blog

I previously discussed what a security is and who are accredited investors. Non-accredited investors are typically excluded from most syndicated private placements. This is part of the cause of the investor isolation in the self directed IRA/401k marketplace.

The stock market’s growth has been because it’s easy to invest in it because of fractional ownership. You can’t afford to buy Microsoft outright, but you can afford to own a millionth of a percent of it. Self directed accounts have failed to go mainstream because securities laws get in the way of making fractional ownership simple for the non-accredited investor.

Assuming you are not accredited, so far your options in pooling money are:

1. Ignore securities laws - Very bad idea. Investments are supposed to be profitable. When securities laws are ignored, you could face huge fines and even prison.
2. Regulation D offerings- You can create or find a “Red D” offering. In this arrangement disclosure requirements must be met, and notices must be filed with the SEC and/or state securities agencies for each state in which there is an investor. It’s recommended that an attorney create the disclosure documents, and this can typically cost $10,000 and up. (Again check www.nfhlaw.com for more free info on Red D offerings)
3. Form an Investment Club - If every investor actively participates in investment decisions, then there probably isn’t an investment contract or security. (more…)
   

There’s a case (the Howie case - can somebody provide me a good link that explains it?) that defines a security as an investment contract in which a person invests their money into a pool and expects to receive a profit solely from the efforts of others. So typically, when a person invests in something it is a security.

You may have violated securities laws in the past without even knowing it. If you’ve invested into your son’s company, it was probably a security and you were the investor. If someone has invested in your company, it was probably a security and you were the issuer. I’ve found a great resource for understanding all of this - www.nfhlaw.com - a securities attorney who has published a wealth of information (on her site, check out “Checklists & Legal Info”).

When you are pooling funds together, it makes things easier if all investors are considered accredited investors - having a net worth of at least $1,000,000 or having at least $200,000 in annual income. When all investors involved are considered accredited, (more…)