You know the benefits of wise investing, but what about your friends? One way to introduce them to investing and help educate them is through an investment club.
What exactly is involved in overseeing an investment club? As the foundation, you typically would form a meetup that gets together periodically (such as weekly or monthly).
One part of club meetings should be investment education like teaching members how to review offering materials, how to analyze deals, how to vet sponsors, etc. The second part of the meeting would be an chance for members to present investment opportunities to the group along with the accompanying offering or investment materials they have gathered from the promoters.
During the meeting (or a subsequent meeting after everyone has reviewed the offering materials) the group should vote on whether to invest. If you get commitments in writing, you can have each “yes” member indicate how much they will invest. Only those who vote “yes” would be obligated to invest.
The investments would be made via a series of member-managed LLCs (Investment LLCs) encompassing only those club members who voted to invest. Each member’s percentage interest (calculated based on how much they invested in relation to the total amount the members contribute) would determine their profit share.
From a regulatory perspective:
- You wouldn’t want to use a manager-managed LLC or else each investment could be considered a securities offering which would drive up your legal costs and create fiduciary responsibilities for the organizers.
- The operating agreement (or a resolution for the Investment LLC) would designate:
- Who is authorized to open and close bank accounts and sign checks, and
- Who can sign a subscription agreement on behalf of the group and make the investment.
- For safety’s sake, each of the above should include at least two unrelated club members.
- Your group must be limited to 100 members so it doesn’t have to register as an investment company. However, you have to be careful about how you count members, as an LLC with multiple members may count as more than one member.
- To avoid having to register as an investment adviser, no person can be paid a fee in connection with any investment, nor should any one person select investments for the club. However, you could have “club dues” that people pay to club organizers to market the group, remind people to attend, or to provide refreshments for live meetings, etc.
- The club should be limited to accredited investors so that it meets the definition of an accredited investor (i.e., any entity in which all members are accredited investors) and therefore can invest in any Rule 506(b) or 506(c) offering. If you have non-accredited investors, your club would only be able to invest in Rule 506(b) offerings and the entity in which the club invests might have to count your non-accredited investors toward its 35-person limit.
An investment club could be a good choice if you want to help your friends and colleagues be exposed to more investment opportunities without having them invest passively in a group you organize (i.e., syndicate). It could also work for situations where you want to offer club members the ability to invest less than the required minimum investment ($50k-$100k) that most syndicates or funds require. It probably doesn’t work if you are trying to acquire property directly, as someone will have to take an active role in managing it on behalf of the group (turning it into a passive investment for them), which would be better operated as a syndicate.
If you want to know more, click here to view an SEC publication regarding Investment Clubs.
Want us to set up your club? For a limited time, we are offering to set up investment clubs for a one-time $7500 legal fee; each subsequent Investment LLC would be $3500. Please schedule an appointment by clicking here if you would like more information.
