Nature of Investment Clubs
An Investment Club is a club that focuses on investments for its members. It is a group of people who pool their resources together to make investments. Usually, investment clubs are organized as partnerships or companies, and after the members study different investments, the group decides to buy or sell based on a majority vote of the members. Club meetings may be educational and each member may actively participate in investment decisions. The invested sums can be as little as $500 a month. One of the reasons that people come together in investment clubs is to learn how to invest, and to benefit for the scale economies of the collective. Investment clubs are a great way to get into investing and to learn more about investing. It is also a way for you to develop some great friendships and have fun with your finances – hence the social dimension of investment clubs.
From a functional perspective, there are two types of Investment Clubs – the single club portfolio investment club, and the self-directed investment clubs. While investment clubs are commonly organized with members contributing money and investing as a group in a single club portfolio, members of other self-directed investment clubs simply meet and learn about investing but invest on their own. With the advent of the internet investment clubs have also moved into cyberspace. The first investment club on record dates back to the 1800s in Western America.
Investment clubs are generally formed as general partnerships, but could also be formed as limited liability companies or limited liability partnerships (in states that allow them). While an investment club could incorporate, the double tax treatment on corporate distributions makes the corporate structure less desirable than a partnership. Typically, a general partnership does not generate any tax liability on its own; instead, any tax liability is passed through to members each year.
Legal Framework of Investment Clubs
Depending on the functional type of investment club, members could decide to simply learn about investment opportunities and how to so invest, and thereafter invest on their own (the self-directed investment clubs). This type of investment does not require any form of registration and does not need further regulation. The simple rules of professional liability for negligent misstatements or advice, may apply as the case may be. Where the members decide to go the route of the single club portfolio investment club, then the answer to question – what regulatory requirements there are would depend on the form that the club is structured.
‘Collection Investment Scheme’ has been defined under the Investment and Securities Act as “a scheme in whatever form, including an open-ended investment company, in pursuance of which members of the public are invited or permitted to invest money or other assets in a portfolio, and in terms of which: –
(a) two or more investors contribute money or other assets to and hold a participatory interest in a portfolio of the scheme through shares, units or other forms of participatory interests;
(b) the investors share risk and the benefit of investment in proportion to their participatory interest in a portfolio of a scheme or on any other basis determined in the deed, but not a collective investment scheme authorised by any other Act”
The Act empowers the Securities and Exchange Commission to approve a collective investment scheme which is administered as a unit trust scheme, open-ended investment company, or real estate investment company or trust. The SEC may also by Gazette designate a scheme as constituting a collective investment scheme.
To run a collective investment scheme, a person is required by law to have registered under the Companies and Allied Matters Act 1990, with the Corporate Affairs Commission; and also registered as a fund or portfolio manager by SEC. The failure to register is a contravention of the Act with penalty/ fine liabilities.
Investment Club Rules
One of the most important parts of an investment club is the rules. Investment Club Rules cover everything from the actual act of investing to how the club is run. The rules help to keep everything orderly and help to ensure that everyone has a good investment experience. From the start it is important that an investment club has these set rules. These initial rules should cover some important aspects of the club and how it works.
– One of the first rules about an investment club is that membership is usually limited. In order to keep the numbers low so that everyone can get the attention needed and investments can be well managed most investment clubs are limited to around 15 members, maximum. An investment club is all about business. It is not just a hobby but an actual business venture where you will all be working together on investing your money. For this reason having some clear cut rules is very important.
– The meeting time and place should be discussed and established. It is really important that all members are together in deciding this point. This should be a rule that is taken very seriously. Missing meetings could greatly affect members’ ability to stay on board with the investment club.
– Next thing is the name of the club. This is something that can be fun and something that should be played around with. It is not something that needs to maintain the serious nature of the club, but rather should reflect its members and the whole atmosphere of the club.
– The next rule should be forming a partnership and drawing up the club agreement. This is an important task. This is the actual establishment of the club and of the financial end of the club. It will help when tax time comes around and help to ensure everyone is in agreement about how the club works.
– The next rule would be to set up the financial particulars. There should be a minimum monthly contribution by each member into the investment budget. This can be based upon a mutual agreement by all members.
– Lastly the club should draw up some goals and finalize any loose ends to make sure everyone is on the same page.
Your investment club may wish to draw up other rules. They may want to establish rules involving new members or other rules that will help the club run smoothly and ensure that anything in the future that may come up will already be governed by the club rules. The club may also want to establish officers and the particulars about elections and terms. Some groups may choose to not have officers, which is also fine. This is a choice for each club depending on how formal or casual they want the club to be.
Other things to consider when it comes to investment club rules is about bringing in outsiders to help, like accountants, lawyers and even a stock broker. Hiring professionals to work with the club is something that may be needed in order to ensure everything is done in a professional way. It can also help to avoid problems with legal issues or taxes. By the end of the first meeting, though, the club should pretty much have a good set of ground rules and clearly define the nature of the club and their investment strategies. Rules just help the whole club work and move along nicely.
Are investment clubs regulated by the SEC?
Investment clubs usually do not have to register, or register the offer and sale of their own membership interests, with the SEC. But since each investment club is unique, each club should decide if it needs to register and comply with securities laws.
– Under the ISA 2007 membership interests in the investment club may be securities. If so, the offer and sale of membership interests could be subject to the ISA.
– Under the ISA, an investment club may be an investment company or carry out funds management or be port-folio investors, and regulated.
When does an investment club have to register the offer and sale of its membership interests with the SEC under the Investment & Securities Act 2007?
Since the Securities Act requires the registration of the offer and sale of most securities, the investment club must first decide if its membership interests are “securities.” Generally, a membership interest is a security if it is an “investment contract.”
Generally, a membership interest is an investment contract if members invest and expect to make a profit from the entrepreneurial and managerial efforts of others. If every member in an investment club actively participates in deciding what investments to make, the membership interests in the club would probably not be considered securities. If the club has any passive members, it may be issuing securities. Sometimes offers and sales of securities do not have to be registered because they are exempt under the law. For example, a non-public offering is exempt.
How do you know if an investment club is making a public offering?
An announcement that a club is looking for new members might be considered a public offering, but this is determined on a case-by-case basis. A Lawyer with experience in securities law can help the club determine if its membership interests are securities, and if the club is making a public offering of those securities.
Do securities laws apply to a person who provides advice to an investment club?
If the adviser is compensated for providing the advice regarding the club’s investments, the adviser may need to register according to the ISA as a Capital market Consultant. Also, if one person selects investments for the club, that person may have to register as an investment adviser.