Private Placement Memorandum Costs & Self Directed IRA

7 Replies

I am buying a property and want to have an out of state friend be a 20% equity partner in the investment. However he wants to use his self directed IRA. The IRA custodian says that we need a PPM in place to have him invest in my LLC.

It seems like a lot of paperwork to have him invest, Why do we need to register with the SEC and how much will all that cost?

The property is a 4 family and I would be 80% owner and he would be a silent 20% owner. 

Any advice on how to do this?

Every SDIRA provider is different when it comes to documentation requirements. We don't have those requirements. It more common to require common LLC documentation like operating agreements, EIN number, articles of incorporation, etc.

If your friend doesn't want to switch IRA providers, perhaps you can look at having him partner with the LLC instead of into the LLC. Just a thought. If there is leverage that could make things complicated.

I'm happy to answer any additional questions.

It is always a good idea for you to speak with your own attorney when you are soliciting investments into a company. We also, as SDIRA administrators, ask for information on a company our clients want to invest. We ask for this information if the clients is lending or becoming an equity investor in the company.

Since I am not an attorney I wouldn't give you advice on the way to structure this deal. It is good to be aware, though, that there will be requirements even (or especially) when investing with a SDIRA.

Jaime Raskulinecz

 @Shawn M. :

It seems like a lot of paperwork to have him invest, Why do we need to register with the SEC and how much will all that cost?

It sounds like the IRA custodian is simply trying to cover his or her rear. Also, a private placement memorandum is just good practice. The IRA in most cases is the investor's life savings/retirement account, hence the memorandum should be the very least of your concern. The IRS is very sensitive on how or what IRA funds are being utilized for. It doesn't seem from what you described that a registration with the SEC would be necessary per se -- especially if they are accredited.

@Shawn M.

I agree that a deal of this nature does not require SEC registration.  With one partner in a real estate deal, you are not creating a security.

An alternative to having your friend buy equity in your LLC would be to vest title jointly as tenants in common. His IRA custodian should be able to handle fractional interest in real property.

The unfortunately reality is that a lot of custodians are not very helpful when it comes to helping you figure out how to actually transact with their accounts.  Some if this is by rule, but some is institutional within the particular organization.  

A real estate attorney with some familiarity with the particular custodian should be able to help you out.

Account Closed 

 Thanks for your advice, If I go went the Tenants in Common route that would be 50/50 or could you do other percentages?

@Shawn M.

I think you wrote the deal would be 80/20.  The law allows for any formula, but typically the amount of equity would be what you want to go with.

LLCs are considered securities in some states and may be required to meet the standards of securities offerings.  In other states, they are not.  Would it not be wiser to address legal questions to your own attorney, in your own state?

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