Accessing Growth Capital – An Alternative Source

Accessing Growth Capital – An Alternative Source

By Peter Moore

September 19, 2011

In the best of times it’s still challenging to access growth capital for small and lower middle market sized companies.  Other than bank loans and economic development agencies there are few substantial sources of organized capital available for early and growth stage companies. However, some often overlooked sources of funding are the investment accounts of Self-Directed IRA and 401(K) retirement accounts.

Nest EggMillions of Americans hold hundreds of billions of dollars in their IRA and 401(K) plan accounts. Many are disappointed in the performance and seek alternatives to try and improve on their results as they continue to fund these accounts with regular periodic contributions.

Under the IRS tax code certain private investment transactions are permitted within the investment guidelines for IRA and 401(K) retirement plan accounts. (See you tax and retirement specialist for details) They include private equity investments, commercial real estate, loans to businesses and much more.

Until recently,  most financial institutions, offering  IRA and 401(K) plans, would not allow these private capital transactions, instead favoring and focusing solely on publicly traded stocks, bonds and mutual funds. Nor would they act as custodian for private capital investments, thereby keeping their client’s funds dedicated only to large institutional investment products. So most, if not all, of the smaller business economy of the country was off limits to IRA and 401(K) investors.

Now a number of smaller investment firms have developed expertise in assisting their IRA and 401(K) plan investment clients to access private capital transactions and provide funding to deserving emerging and growth oriented companies. This includes the essential custodial services required by the IRS.

There are two basic ways to access private IRA and 401(K) capital funding. The first is to identify an investor who wishes to make a direct investment into a company but wants to use his Self-Directed IRA or 401(K) account resources. In this case they would have to set up an account at a firm that permits the private capital investments.  Funding is usually done via a Roll-Over of existing IRA funds into a Self-Directed IRA or 401(K) account.

The custodian will review the private company’s offering documents for completeness and then will authorize the security purchase or loan. They don’t, however, make investment decisions or recommendations.  That’s completely up to the investor.  They simply facilitate and hold the investment documents for safekeeping.

The second way to access private IRA and 401(K) resources is to have the custodian firm present a private capital offering to their clients as an available opportunity.  In this case a more formal set of transaction documents may be needed, and some marketing material may be necessary.  Depending on the total funding required one or several individual investors may be needed to fulfill the financing round.

In all cases both state and federal securities laws apply and all sponsors of any offering are cautioned to take special care with compliance requirements. In most cases any equity investment would be via a Reg-D sanctioned offering which does not require the registration of the securities offered.

One west coast firm has become a leader in offering IRA and 401(K) plan accounts and related custodian services, to handle private capital transactions an well as conventional publicly traded stocks, bonds, ETF’s and  mutual funds.  Some firms will even showcase deals to their investor clients who have indicated a desire to get involved in alternative asset investing.

Whether your company needs $25,000 or several million dollars, this often overlooked but abundant resource is a refreshing opportunity in an otherwise challenging market for accessing capital.



Posted by Peter Moore.