In recent years, interest in investment clubs has grown tremendously. This Financial Guide tells you what you need to know about investors' clubs before getting involved with one.
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An investment club is a group of people who pool their money to make investments. Usually, investment clubs are organized as partnerships. After the members study different investments, the group decides to buy or sell based on a majority vote. Club meetings can be educational in nature, and each member may actively participate in investment decisions.
Investment clubs do not usually need to register, or to 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.
We'll discuss two securities laws that might apply to investment clubs:
Since the 1933 Securities Act requires registration of the offer and sale of most securities, the investment club must register 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.
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.
An investment club must register with the SEC as an investment company under the Investment Company Act of 1940 if all of the following three apply:
If an adviser is compensated for providing advice regarding the club's investments, the adviser may need to register under the Investment Advisers Act of 1940. Also, if one person chooses 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.
Neither the Investment Advisers Act of 1940 nor many state laws require registration for advisers with small numbers of clients.
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.
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