Investment clubs and questions about them have grown tremendously. Here, are answers to some of the most Frequently Asked Questions.
Q1.What is an investment club?
A. An investment club is a group of people who pool their money to make investments. Usually, investment clubs are organized as partnerships 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.
Q2. Are investment clubs regulated by the SEC?
A. 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.
Q3. When does an investment club have to register the offer and sale of its membership interests with the SEC?
A. 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.
Q4. When does an investment club have to register with the SEC as an investment company under the Investment Act?
A. An investment club must register with the SEC as an investment company under the Investment Act if all of the following three conditions apply:
i. The club invests in securities,
ii. The club issues membership interests that are securities (see above), and
iii. The club is not able to rely on an exclusion from the definition of Investment Company.
Q5. How do you know if an investment club is making a public offering?
A. 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. An attorney 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.
For further clarifications on the above, kindly consult your financial adviser, attorney at law or your stock broker.
