An investment club comprises of a group of people that are
formed by means of membership and meets regularly either in person or online in
order to study and purchase individual stocks by means of a pool of money from what
each member has contributed.
Generally, an Investment Club is comprised of the following
formula
Study + Stocks + Socializing = Investment Club
There is no need for investment clubs usually with the SEC not
have to register, or register the offer and sale of their own membership
interests. But since each investment club is unique, each club should decide if
it needs to register and comply with securities laws.
The investment club must first decide if its membership
interests are "securities", since the securities Act requires the
registration of the offer and sale of most 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
The membership interests in the club would probably not be
considered securities if every member in an investment club actively
participates in deciding what investments to make. If the club has any passive
members, it may be issuing securities.
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.
There may be more forms of investment clubs. Some are clubs
made up of co-workers, family members, or high school students.
Recruitment of
the people that are interested in starting a club can be done from their social
clubs, their place of worship, or even complete strangers they meet at an
investing event or by placing an ad in the local newspaper.
Some clubs meet for an hour or two once a month. Some meet
less frequently but then spend a weekend together. Other clubs never meet in
person in any way.
Under the Investment Company Act of 1940, an investment club
must register with the SEC as an investment company if all of the above
mentioned three conditions apply:
- The club invests in securities,
- The club issues membership interests
that are securities (see above), and
- The club is not able to rely on an
exclusion from the definition of Investment Company.
For example, a "private investment company" may not need to
register with the SEC. To qualify, an investment club
- Must not make, nor propose to make, a
public offering of its securities, and
- Must not have more than 100 members.
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.
In determining the membership interests are securities, and if the club
is making a public offering of those securities, an attorney with experience in
securities law can help the club.
If the adviser is compensated for providing the advice
regarding the club's investments, the adviser may need to register according to
the Investment Advisers Act of 1940. Also, if one person selects investments
for the club, that person may have to register as an investment adviser.
In general, a person who has $25 million or more in assets
under management is required to register with the SEC under the Investment
Advisers Act of 1940.
A person managing less than $25 million may be required to
register under the securities laws of the state or states in which the adviser
transacts business.
Both the Investment Advisers Act of 1940 and many state laws
do not require registration for advisers with a small number of clients.
According to the Investment Advisers Act of 1940, the
adviser may need to register if he is compensated for providing the advice
regarding the club's investments. Also, if one person selects investments for
the club, that person may have to register as an investment adviser.
In general, under the Investment Advisers Act of 1940, a
person who has $25 million or more in assets under management is required to
register with the SEC.
Under the securities laws of the state or states in which
the adviser transacts business, a person managing less than $25 million may be
required to register.
For advisers with a small number of clients both the
Investment Advisers Act of 1940 and many state laws do not require
registration.
Online Investment Clubs
Online Investment Clubs make the most of the miracle of the
Internet, and conduct all their club activities using e-mail, Web sites, and
real-time chat to communicate. As more investors become dependent on the Web
for gathering the financial information, completely online clubs are growing in
popularity.
For students or others who move frequently, online
Investment Clubs also are perfect and therefore can't commit to a traditional
club since they know they'll soon be living in a different county or state.
Even
many extended families may live for apart, they use online investment clubs as
a way of keeping family members connected.
State securities laws may differ from federal securities
laws. To learn more about the laws in your state, call your state securities regulator.
To get the telephone number for your state, visit the North
American Securities Administrators Association (NASAA) website.
To learn more about investment clubs or investing, visit
your local library. You may want to contact the National
Association of Investors Corporation (NAIC) website. This membership
organization provides education for individuals and members of investment
clubs.
If you have a complaint, send them your complaint by using their
online complaint form. You can
also reach them at:
Securities and Exchange Commission
Office of Investor Education and Assistance
100 F Street, N.E.
Washington, D.C. 20549-0213
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