The ERISA consultants at the Retirement Learning Center Resource regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.
A recent call with a financial advisor from New York is representative of a common inquiry related to special purpose acquisition companies (SPACs). The advisor asked:
“I have a client with the opportunity to invest in a Special Purpose Acquisition Company (SPAC). The client wants to use retirement assets (e.g., IRA or 401(k) plan assets) for the SPAC investment. Can this be done?”
Highlights of the Discussion
This question can only be fully answered by your client’s tax and legal advisors. The following response provides some general information on the topic based on the guidance issued to date. It is for informational purposes only and cannot be relied upon as tax or legal advice.
Your client may be able to invest in a SPAC using retirement assets, but another question to ask is: should he or she. That’s where expert guidance from tax and legal counsel is necessary. To be sure, SPACs have been getting a great deal of media attention of late, and many individuals are interested in using retirement account assets to invest in SPACs.
First, let’s define some terms so we have a basic understanding of the transaction.
A SPAC is a corporation with the sole purpose of raising capital to acquire (actually merge with) a privately held entity, which is then taken public. The SPAC itself has no ongoing business operations and is used exclusively to raise capital for the acquisition. The end result of the SPAC process is similar to that of an initial public offering (IPO), which is the process of offering shares of a private corporation to the public for purchase. The SPAC process has fewer Securities and Exchange Commission (SEC) restrictions and requirements, and thus may be preferable in certain situations.
Investors simply pool their money and create the SPAC. The SPAC goes public as a shell company, targets a real company that wants to go public, and the two entities (the SPAC and target company) merge. For example, here is a list of List of Shell Companies or Special Purpose Acquisition Companies.
There are no laws or regulations that explicitly prohibit the use of IRA assets to invest in SPACs. That said, however, one concern is whether the IRA custodian or trustee would permit such an investment to be held in the IRA. Also, depending on the relationship between the investor, the SPAC and the target company, one would need to be sure that no prohibited transactions occur.
Similar concerns exist with using 401(k) assets to invest is SPACs. In addition, it is unlikely that a plan sponsor would permit a SPAC as an investment option in a 401(k) plan, but it may be possible to make a SPAC investment through a self-directed brokerage account within the plan if one is available. These are complex matters; plan administrators should proceed with caution, and only with the advice of legal counsel.
Conclusion
SPACs may be “hot”—but maybe too hot to handle with retirement plan assets without expert guidance.
Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Consumers should consult with their tax advisor or attorney regarding their specific situation.
©2021, Retirement Learning Center, LLC. Used with permission.
