Being 1 of the 35: Private Equity Placement for Non-Accredited Investors
I am an Institutional Sales Manager at Pacific Premier Trust and over the past decade a lot of deals have crossed my desk. I work with firms whose clients invest in private equity using their self-directed IRAs, and the vast majority of private equity deals I review are mostly marketed only to wealthy, accredited investors.
This doesn’t mean non-accredited investors cannot participate in private placements and invest their retirement dollars in private equity opportunities. But it does mean there are guardrails for doing so, and the opportunities for non-accredited investors to participate in these deals can be limited.
Why are private placement offerings typically marketed solely to accredited investors?
A big part of this is due to securities rules, which dictate how sponsors can solicit investors. For instance, if a sponsor wants to engage in “general solicitation” to drum up interest for its offering by advertising, the sponsor can only raise money from accredited investors according to Rule 506(c) of Regulation D. Accredited investors are considered by the Securities and Exchange Commission (SEC) to be sophisticated enough to understand the risks of what they are investing in and also to be wealthy enough to handle potential losses.
Some securities rules provide flexibility and allow non-accredited investors to participate in private offerings. For instance, under Rule 506(b) of Regulation D, a sponsor can raise funds from accredited investors and 35 non-accredited investors as long as the sponsor does not use general solicitation or advertising to market securities. In addition, those non-accredited investors must be “sophisticated,” meaning they have sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of the prospective investment.
How can you become 1 of the 35 non-accredited investors?
These deals are still primarily marketed to accredited investors and getting access to them is difficult. Often, sponsors who raise funds from non-accredited investors do so because those investors are friends or family members. Knowing a sponsor directly—or being a friend or family member of someone who does—is still often the best way of finding out about these opportunities.
Why participate in private placement offerings with IRA funds?
If you are provided with the chance to participate as a non-accredited investor, it can be an opportunity to diversify your retirement portfolio with an alternative investment. While potentially risky, private equity investments can deliver higher returns than public equity markets. According to the American Investment Council, private equity returns have outpaced public market returns for the past ten years.
*Net to limited partners
Sources: American Investment Council, Performance Update 2019 Q1, Cambridge Associates, S&P Capital IQ
Investing in private equity may also be a good match for retirement funds. The dollars you put in your IRA tend to be those with a long investment horizon, which match the longer holding periods required of many private equity investments.
What should a nonaccredited investor consider when reviewing a private placement?
A robust amount of due diligence should be conducted before investing in a private placement. The SEC says you can participate in one of these deals as a non-accredited investor as long as you -- or a purchasing representative you work with --are “sophisticated.” This means you must have sufficient knowledge and experience to be capable of evaluating the merits and the risks of an investment.
At Pacific Premier Trust, we review deals for administrative feasibility only, meaning we determine whether an asset can be held in a tax-advantaged retirement account. We do not review the merits of the offering, and we cannot offer investment advice. We also do not track how many non-accredited investors are participating in an offering.
If you are considering a private equity deal, it's best to consult with a trusted financial professional who can help you asses the deal's risks and determine whether it meets your long-term investment goals. You should also vet the sponsor to ensure it is one you are comfortable investing with and one who will be diligent in following securities rules when it comes to allowing non-accredited investors to participate in their offering.
The world of private equity is always shifting, so if you have questions on investing in private equity using your retirement dollars, please call us at 800.962.4238 or email us.
This Blog does not provide investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Investments are not FDIC insured and are subject to risk, including the loss of principal.
Pacific Premier Trust (formerly PENSCO Trust Company) performs the duties of an independent custodian of assets for self-directed individual and business retirement accounts and does not provide investment advice, sell investments or offer any tax or legal advice. Clients or potential clients are advised to perform their own due diligence in choosing any investment opportunity as well as selecting any professional to assist them with an investment opportunity. Alternative investments are not FDIC insured and are subject to risk, including loss of principal. Pacific Premier Trust is not affiliated with any financial professional, investment, investment sponsor, or investment, tax or legal advisor.
NOT FDIC-INSURED | NO BANK GUARANTEE | MAY LOSE VALUE