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Raising Capital During the Pandemic? What Entrepreneurs Need to Know

Raising Capital During the Pandemic? What Entrepreneurs Need to Know

The economic fallout from COVID-19 has been staggering — particularly for businesses across industries that have been forced to shutter or drastically reduce operations. But what about those businesses that were in early phases or ventures not yet off the ground? As the pandemic persists, funding for startups and new businesses has stalled, and entrepreneurs may be wondering if now is the right time to put capital-raising plans back in motion, given the state of ongoing uncertainty.

Reports from the crowdfunding platform Kickstarter confirm now is a good time to seek investor support. Kickstarter found that as the pandemic ramped up in March and April, the number of projects on the platform was down 30%, but the funding success rate for projects remained at 45%, in line with what the site witnessed pre-pandemic.

Entrepreneurs may not have previously considered or been aware of the benefits of crowdfunding as a component of their funding strategy, and how investors can use their self-directed IRAs (SDIRAs) as a vehicle to support the investment in a more significant way. Below are some reasons why now may be the right time to explore this type of capital-raising strategy:

•  Investors are proactively looking to diversify. With the current volatility in the equities markets, diversification is key, and the volatility is prompting investors to view this as a good time to move IRA funds out of the market and into alternative investments. With an SDIRA, investors can easily invest in equity investment crowdfunding and marketplace lending opportunities on a tax-advantaged basis.

•  IRAs offer another layer of security. At STRATA Trust Company, we’ve witnessed recently that many investors interested in holding private equity are more comfortable maintaining their investment within their IRA. With the current uncertainties in the global economy, many individuals are choosing to hold on to their personal wealth. But an individual who is under the age of 59 1/2 cannot use their IRA funds, so holding the private placement inside of the IRA is appealing, given the current circumstances.

•  IRA investors widen the investor funnel. Companies that are raising private capital in this environment need to broaden their investor “funnel.” Some institutional investors and family wealth offices have scaled back given the current conditions. This means that capital raisers might need to look to individual high-net-worth investors. Most high-net-worth individuals have IRAs, and some don’t know that those funds can be used to invest in crowdfunding investments.

•  Uncertainty persists so now’s the time to act. Financial experts are currently debating whether this recovery is going to be “V” shaped or “W” shaped – the latter meaning there’s still some speculation of another market pullback. Time will tell; however, we are currently close to being back to where we started before COVID-19 hit. If investors are interested in moving some of their IRA funds out of the market, now might be an opportune time.

In 2010, STRATA Trust Company became the first custodian to provide self-directed IRA services in the crowdfunding space. We make it easy for investors to set up an account and direct their investments into the crowdfunding opportunities they believe in. Interested in learning more about how investors can use their retirement savings to fund your business venture? Please contact us at [email protected].

 

Disclaimer: The information provided herein does not, and is not intended to, constitute personalized financial or legal advice. The contents of the article are for general informational purposes only and should not be relied or acted upon without specific professional legal or financial advice, based upon an individual’s situation.

Tags: crowdfunding, IRA, ira contributions, IRA investments, IRA rules, IRA tax laws, tax strategy