I disagree with ProPublica's take. If it was as simple as "pay just fractions of a penny per share... watch as all the gains..." then we would all do it. Not just with Roth IRAs, but with our entire portfolios. The reason we don't all do this is because startups are very very risky. Some people will succeed and walk away with windfalls. Other people will lose their shirts. If there was arbitrage, there would be a an "app for that" and there would be more billionaires walking around.

What they seem to be suggesting is that a fair valuation (well reasoned given all information) of the shares would have put the investment at millions of dollars, but due to a peculiarity of historical accounting, they could be put at worth $2K because that was the creation price and the last print.

For instance, it might be that a funding round was about to happen. This is never a sure thing, so you could claim that the shares are not worth the full price (and in any case the only trade was at 2K), while privately thinking "hmm, my shares are now worth x millions".

You then sell the shares to the Roth, thinking yourself that you're putting x millions in the vehicle while reporting 2K.

Doesn't sound illegal to me, but it also doesn't sound like things are supposed to work this way.

Or just exclude private shares from Roth IRAs.

Most people are non-accredited investors and therefore ineligible to buy them.

Startups won’t miss out on the $2000/yr from the few that are eligible.

This is what Canada does with its Roth equivalent, the TFSA.

Though Canada restricts your private shares to Canadian corps. Not as many startup home runs that stay Canadian before becoming public.

Forcing all IRA investment through publicly listed companies sounds like exactly the law a hedge fund would write. Why allow people to invest in assets you can own without going through a Wall Street investment bank?

Regulatory capture is forcing the entire economy through your cartel in the name of nominal protection.

Publicly listed companies are equally available opportunities for anyone participating in the contribution rate-limited game of Roth IRA maximization.

Private share contributions give huge asymmetric upside to private investors/founders. Yes they take risk in that their shares still have to end up being worth something one day, but clearly the upside tax advantages are ridiculously unbalanced against the middle class because not everyone has access to early stage investments.

So, even the playing field by:

- Letting anyone invest in early stage companies (this has many other implications)

Or

- Only allow cash contributions to IRAs

You can buy publicly traded companies without going through brokers/stock exchanges.

What can be assured is that the exchange can be booked at a market value, which can never be guaranteed in a private sale in an opaque market, risking shenanigans to shift value beyond the contribution limit.

(You can say a corp’s initial shares have zero value, but we can all agree here that a Corp formed to execute on a startup team’s plan/idea absolutely does have value).

The key is knowing exactly which startup to put your $2000 in.

> The key here is that if you have to reliably identify exactly which startup to put your $2000 in.

No. Theil was already making a risky startup bet, so the "reliably identify" point is moot. All this maneuver did was let him avoid all the taxes he'd owe if it paid off.

No, the key is being able to sell yourself something for far less than its actual value so that you can squeeze millions of dollars worth of assets into the few thousand dollar contribution limit for an IRA.