Purchasing Pre-IPO Stock using Roth IRA

[Guest rrpatel]

I wanted to know if anyone here has experience in purchasing pre-IPO stock using their IRA?

I am looking to purchase shares from a current stockholder in the company. The company will allow the sale of the shares, just have to get approval.

Thanks,

Rick

[J Simmons]

The fact that the IRA is a Roth v Traditional should have no bearing on what it can be invested in.

However, there are securities laws implications (a current shareholder would be selling shares--securities--to the IRA). So either there will need to be an exemption or registration that permits this sale. The company and the selling shareholder ought to have the securities lawyer handling or preparing the IPO take a look and issue an opinion first.

There is also the possibility of a prohibited transaction if the IRA owner has too close a connection with the company or its shareholders, particularly the selling shareholder. You'll need an analysis and an opinion from an ERISA expert about whether there would be a prohibited transaction. IRC 4975.

While you mention 'stock', if this is stock in any type of company other than a C corporation you also have the potential for unrelated business taxable income (UBTI). You ought to also obtain an analysis and an opinion from an ERISA expert about whether there would be UBTI. IRC 512-514.

[John G]

All of the above and more.....

Custodians often will reject this kind of transaction. First, because it requries special handling and therefore rings up some costs. Second, because they may be risk adverse for all sorts of reasonable and silly reasons.

Depending upon what kind of stock/company you may be talking about, you could run into some issues with Reg "D", sophisticated investor, and/or qualified investor. There are barriers to just creating stock and selling it. Some states have "blue sky" rules that might allow you to own this stock. Others restrict individual ownership of traded stock to those listed on an exchange. There is a difference between owning stock in a Sub S corp, or regular corporation that you have founded and trying to buy stock in an unregistered company. The range of circumstances is gigantic and you provided little details. Are we talking Cargill (which I think is the largest privately held company in the world) or some mom & pop Sub S corp.

Feel free to post more details, but what you really need to do is find someone in your state who is familiar with secuity laws. Ask your accountant for a reference, or try you local bar for a lawyer that is familiar with major corporate structurings and securities laws... this is a narrow part of general business law.