Investing in US Seed Rounds

I'm looking at investing in a company via https://www.seedinvest.com/the.hustl...ial_discussion

The company is registered in Delaware, USA.

Is anyone aware of any tax pitfalls when investing in US start ups? Both from the IRD or IRS?

I understand there is the $50K, but that it doesn't apply if the shares were purchased for less than $50K (I am expecting them to increase in value to more than $50K though). http://www.nzherald.co.nz/business/n...ectid=10432824

lack of liquidity. lack of investor protections, high risk of failure

re tax, note that $50k threashold is for your overseas portfolio, not each individual holding and is measured on cost price, not market value.

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Originally Posted by Harvey Specter

lack of liquidity. lack of investor protections, high risk of failure

re tax, note that $50k threashold is for your overseas portfolio, not each individual holding and is measured on cost price, not market value.

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Sorry I meant tax pitfalls, not pitfalls in general. Thanks!

A quick read of the seedinvest.com link you posted tells me that the investment is in convertible notes, a type of debt. I haven't read the prospectus to find details of when and how these notes would convert to equity.

I don't think that convertible notes would fall under the rules for overseas shares or FIF rules because they aren't yet an equity ownership in the company. I would assume that the convertible notes would be taxed under the Financial Arrangement rules instead.

Getting reliable valuations of these notes to calculate your income could be a challenge for an illiquid investment such as this.

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Originally Posted by hamishmac

A quick read of the seedinvest.com link you posted tells me that the investment is in convertible notes, a type of debt. I haven't read the prospectus to find details of when and how these notes would convert to equity.

I don't think that convertible notes would fall under the rules for overseas shares or FIF rules because they aren't yet an equity ownership in the company. I would assume that the convertible notes would be taxed under the Financial Arrangement rules instead.

Getting reliable valuations of these notes to calculate your income could be a challenge for an illiquid investment such as this.

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Thanks for that. From a quick read of those rules, it seems I am under the thresholds there too (I am looking to invest maybe US$25K) and so if I did receive any income from the note before it became equity, I would just return it normally. Source http://www.gibsonca.co.nz/newsletter...me_attribution

And given when my note is converted (if it ever is) it will only be converted at a max of $25K + 15% interest pa + 15% discount. So it would take a few years of sitting there as a note to be worth more than $50K (under the overseas shares rules).

Convertible note will probably be under the financial arrangement rules. If you invest in your own name, you should met the cash basis holder exemption so only have to return income on a realised basis. Remember that with financial arrangements, 'income' is everything, including forex movements. I am not sure how the discount would be treated but potentially that value gain could be treated as income at the time of conversion - looking at this you have to bifurcate the note - http://www.nzvif.co.nz/assets/docume...nvertNotes.pdf - which sounds complicated, but probably gives a better result.

You also then risk the conversion price putting you over the $50k cap so you will then be paying deemed rate of return on an illiquid investment which doesn't pay dividends.