Groups of individuals may form partnerships or other organizations in which they pool investment resources and ideas. The extent to which a membership in the club might be considered a security and the extent to which members of the club participate in decisions of the club will affect application of federal securities laws to activities of the club and its members.
Investment clubs traditionally have been structured as partnerships of the members with the business of the partnership restricted to the investment of funds contributed to the partnership by club members. Some states have enacted laws providing for a limited liability partnership structure that investment clubs may consider.
Clubs may have to register with the Securities and Exchange Commission under the Securities Act of 1933 or with state securities regulators if interests in the club are considered securities. A membership in a club may be considered a security if the membership is an “investment contract.” Whether an investment contract exists in turn is determined by the extent to which members contribute funds to the club with the expectation that profits on those funds will come from the enterprise and management of others rather than from the efforts of the contributing member.
Thus, to avoid the need to register memberships in the club as securities, regular and active participation by club members in club investment decisions may be required. If membership may be passive, the issue of whether memberships are securities to be registered may arise.
Clubs with memberships that may be deemed securities also may be considered investment companies required to register with the Commission under the Investment Company Act of 1940. However, even if the memberships are considered securities, registration under the Investment Company Act may not be required if the club meets the requirements for an exemption as a “private” investment company. That exemption applies so long as the club or private investment company does not make or intend to make a public offering of memberships in the club and so long as the club does not have more than 100 members.
A member of a club who is paid to provide investment advice to the club may have to register with the Commission under the Investment Advisors Act of 1940 if the member has $25 million or more in assets under management or with state securities authorities if the amount under the person’s investment management is less that $25 million.
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