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Eliminating securities problems - Part 2 March 19, 2008

Posted by Jeff Nabers in Self Directed IRA/401k.
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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…)

Eliminating securities problems - Part 1 March 19, 2008

Posted by Jeff Nabers in Self Directed IRA/401k.
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1 comment so far

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…)

Increasing buying power March 19, 2008

Posted by Jeff Nabers in Self Directed IRA/401k.
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These are the primary ways of increasing buying power when putting real estate into a retirement account:

  1. Mortgage financing - This has to be in the form of a non-recourse loan, which is typically limited to about 70% LTV. This can double or sometimes triple your buying power, allowing you to have three assets instead of one.
  2. Buy cheaper assets - Instead of buying property in San Francisco, consider buying property in the midwest - it will probably provide better cash flow and will be less susceptible to severe price corrections. This may also involve a mental shift away from aiming solely for appreciation. This increases your buying power in the sense that you can afford to hold more lower priced properties.
  3. Partner with others - This is by far the most powerful way to increase buying power. There’s no limit to how many partners you can have and how much they can co-invest.

Partnering with others is essential for the self directed IRA/401k investor who has less than $1,000,000 in his account. Here’s where it gets tricky:

Securities

When investing into a venture, the investment can often be a security as interpreted by the SEC. This brings in a whole new set of rules and complexities. My next post will be about how to get rid of the complexities and eliminate the security.