IRAS AND SEARCH FUNDS: BE MINDFUL OF PROPOSED CHANGES TO REGULATIONS

You may already have heard that the House Ways and Means Committee recently proposed changes to the pending Build Back Better legislation that will reconcile the spending measures it contains and thus avoid a filibuster in the Senate.

These changes, if they remain in the final version of the bill that Congress passes, could dramatically impact the use of IRAs to invest in search funds. At least three categories of investors need to understand how they might be affected:

1. Individuals who want to invest their IRA into an acquisition they are making,

2. Individuals that want to invest their IRA passively into a search fund, and

3. Individuals that have already invested funds from their IRA into a search fund offering.

Here are some of the changes that are relevant to each category:


Individuals who want to invest their IRA into an acquisition they are making


The current regulations allow individuals to invest their IRAs into a company that is less than 50% owned by disqualified persons (generally themselves, spouses, and certain other family members). The proposed changes would limit total ownership by these parties to 10% if an IRA is used to make the investment.


Furthermore, current regulations allow the IRA account holder and/or other disqualified persons to serve as an officer, director, or other key decision maker of the company provided that certain conditions are met. The proposed changes would prohibit any IRA investor from serving in these roles regardless of the ownership percentage.


Individuals that want to invest their IRA passively into a search fund


Another proposed change would prohibit an IRA from investing in any offering that requires the investor to be accredited (such as, for example, a private fund offered under a 506(c) exemption).


Individuals that have already invested funds from their IRA into a search fund offering


Should these changes be adopted into law, IRA account holders will have until December 31, 2023, to liquidate any investments that meet the above criteria. If this has not been done, the IRA will cease to exist and any taxes and penalties will be due in[redacted]For a Traditional IRA, the combined taxes and penalties could amount to 50% to 60% of the IRA account value.


If you have a self directed IRA that you think may be impacted by this proposed legislation, you should contact your IRA custodian for clarification and to discuss the options that are available to you.



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