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By John “Jack” F. Kiley, CPA, CISP
Managing Partner / MidAtlantic IRA, LLC

I’ve come to notice that one of people’s main concerns when looking into investing with their Self-Directed IRAs is not how to go about doing so, but how to spot a scam throughout the process. Luckily, there are a number of government agencies, including the SEC, FINRA and FBI, which work to detect fraudulent IRA investments. However, some scammers can still slip through the cracks, and therefore, it’s important that you recognize any red flags that may appear during an investment.

As the owner or potential owner of a Self-Directed IRA, it is your responsibility to determine whether an investment is right for you and your individual portfolio. The following are three simple steps you can take to begin assessing your potential investment.

  1. Look at the promoter
  • Be sure he is who he says he is, but this is not strictly referring to his reputation. It’s very easy for a formerly distinguished promoter to fall into the penal system.
  • What credentials does the promoter have? Is he/she a lawyer, CPA or broker? Do some investigative research. Every state operates a website listing all license holders. Many also report any disciplinary actions taken against these individuals.
  • Who gets paid in the transaction? Ask the promoter how he/she gets paid. As any economics professional will tell you, there is no such thing as a free lunch. While everyone deserves to make a living, if the promoter is not willing to tell you how much and in what way he/she gets paid, dig deeper. Full disclosure of this information is expected.
  1. Look at the deal:
  • Is there a written business plan? If the person asking you to make an investment doesn’t have a written business plan, he/she may not have thought the transaction completely through or could be trying to mislead you. If the promoter has a plan, it should be in writing.
  • Is it too good to be true? If the investment model shows an unusually high rate of return, be skeptical. The general rule is that if it looks too good to be true, it probably is. Seeing phrases like “guaranteed return” or “approved investment” should send up a red flag.
  • Can you understand the investment? Good investment advisors will caution you against investing in things you don’t understand. Use some common sense; if the investment seems overly complicated, be cautious. The successful transaction is in the underlying economic viability, not the structure.
  • Is the entity registered to do business? Most investments are structured as entities (LCCs, LPs and corporations). These entities are formed under state law and must be registered with the corresponding state. Every state also maintains a listing of registered entities. Contact the appropriate office and see if the entity has been properly registered. The registry will tell you who the resident agent is, so that you know who to contact if a legal issue occurs later on. If the entity is not registered, it has no legal standing to do business.
  • Search for liens and judgments. These are a matter of public record, and if you find any problems, it can impact your ownership over the asset(s) you think you are acquiring.
  • Research the principals offering the investment. Do they have any convictions or have they ever been bankrupt? If they have licenses, verify them similarly to how you verified the promoters. If there is no history of prior success, decide if you’re willing to be their guinea pig or not.
  1. Look at the paperwork:
  • Is the investment registered with the Securities and Exchange Commission (SEC)? If the investment is being advertised to the general public, it must be registered. You should have received a bevy of paperwork regarding the investment. These include prospectus, financial statements, 10K, 10Q, offering circular etc.
  • Check with the SEC to see if the paperwork in your hand was actually filed with the SEC. Only in rare instances are the investors lined up before the SEC filing is made. This is because additional filings are required and it becomes a more cumbersome process.
  • Are the financial statements audited? If you call the auditors, they will tell you if they prepared the financial statements. What is the name of the law firm that prepared the SEC filing? It is extremely easy to make documents look official or to put them on someone else’s letterhead.

Many scams are perpetrated by people with questionable backgrounds, and when discovered, the warning signs seem obvious. If you begin your due diligence with these three steps, you may end up saving yourself a lot of time, money and grief later on.

For more information, please refer to IRS publication 590 or contact us.
info@MidAtlanticIRA.com