Self-Directed Investing and Equity Crowdfunding

For decades now, everyday investors have been drinking the Kool-Aid. We’ve been told that our retirement funds should be put into mutual funds and that the costs to manage those funds are acceptable. Frontline did a piece in April of 2013 around the excess fees associated with the big business of saving for retirement. We can buy stocks and bonds on our own or through a broker, but this comes with limitations. Unless we are rich and well networked, access to the companies and management teams we are interested in investing in is purely second hand – through an investment portal (e.g., Scottrade or TDAmeritrade), Google searches and reading 10-Ks. In addition, unless we are accredited, we are all but excluded from the world of “top secret” private company placements.

But this is 2013 and the investing world is transforming. Some call it the democratization of investing. Investors are no longer content sitting on the sidelines and desire more control. While IRA’s have been around since the 1970’s and 401k’s have been around since the early 1980’s, the idea that an individual can decide to invest his/her funds in a number of alternative investment classes, including real estate, precious metals or private equity, is a newer concept. Basically, you as an individual investor find investments on your own (e.g., a piece of property, a private company issuing stock or some gold) and you authorize the administrator or custodian of your IRA (or 401k) to purchase them on your behalf (or on the behalf of the IRA/401k). Some do the paperwork for you and actually permit you to write checks out of your IRA account to make a purchase. Once you have an account with a Self-Directed Investment house, it’s really just a matter of paperwork and fund transfers – signing a subscription agreement or private placement memo (PPM) for instance.

I must pause here and say that there are folks much smarter than me who work with self-directed IRAs and 401ks everyday – they are the experts. The details of what to invest in and how to invest in it, paired with answering the question “is it right for any particular investor?” are beyond the scope of this article. What I will tell you is that there are some reputable administrators and custodians out there who facilitate these transactions every day. And major companies and media publications also offer FAQs and educational articles such as this from the WSJ.

Now take this “self-directed” investing concept (or DIY investing as I like to call it) and add Equity Crowdfunding to the mix. Anyone who has been keeping up with financial news in the past 8-12 months has probably heard this term. It’s a way for everyday people (both accredited and non-accredited investors) to have the opportunity to invest in everyday companies. Briefly, in April of 2012, Obama signed the JOBS Act which, among other things, created the opportunity for the general public to invest in startups. There are limits to how much an unaccredited investor can invest as well as related risks and various tax treatments of these investments. While we are still waiting on the SEC to publish the rules and regulations around these types of investments in the U.S., global markets, including Australia, the UK and Italy, is alive and well. What’s more, Georgia and Kansas have established rules for intrastate Equity Crowdfunding, which is very exciting. To be sure, there are many investors, business and financial professionals gearing up for the national implementation of the JOBS Act.

You may ask “So what?” “Why should I care?” Or what’s more, if you’re an investor looking for new opportunities, you may ask, “So what do I do now?” Here are some tips that may help you find your path:

1) Do your homework – initially, this will appear to be a rather complex series of overlapping opportunities. There is tons of content available online (both for and against these topics). Consume it. Digest it. Question it. Only after you have done your own due diligence on Equity CrowdFunding and Self-Directed Investing can you determine if either, neither or both are right for you.

2) Understand the risks – as with any investment, there is no guarantee of success. If you invest in the stock market at all, you get it. You could probably recite disclaimers in your sleep. But make sure that if you decide to partake in this type of investing, you know the up-side and down-side and that you are ok with it.

3) Seek advice – as with any complex situation or decision, it’s always best to find experts. Seek out professionals in the Equity CrowdFunding space, in the investment advisory space, CPAs, attorneys and other trusted advisors in your network. Also, if evaluating a business is not your strong suit, make sure you find an expert you trust in that space as well.

I hope you have found this informative, and I hope you share the excitement around where this new frontier in investing could go. To get to this point in the history of raising capital for businesses has taken many years and countless hours of blood sweat and tears by thought leaders and visionaries. No one has a crystal ball. But know that “the way it has always been,” the status quo, is changing. Are you ready?