Investment club

This form of investment club usually meets to develop interest in investing and the intricacies of investing for minors, usually high school students. They typically are led by an adult who has experience in professional investing.

These clubs are groups of people that pool their money to purchase stocks, stock options, mutual funds or bonds. Many clubs are educational in nature with objectives in line with learning how to make smart long-term investments. The National Association of Investors Corporation is a non-profit organization of many investment clubs with this purpose. These clubs may decide to buy or sell investments typically based on a majority votes.

Club objectives do vary and in the U.S. the Securities and Exchange Commission may require that a club be registered depending on the intent of investment. The SEC distinguishes between clubs on the basis of several laws including the Securities Act of 1933 and the Investment Company Act of 1940, which are concerned with whether the club issues membership interests that are effectively securities.

Club officers and members are not normally required to hold a securities license as long as they refrain from soliciting compensation in exchange for financial advice or soliciting the sale of stock, mutual funds or bonds in third party companies. One allowed exception is that a CEO / President or CFO of a C Corporation is allowed to solicit stock or bonds in their corporation as long as they provide a private placement memorandum that complies with the law to their new shareholders. One additional requirement is that non-accredited investors must be Directors of the C Corporation in addition to being shareholders.

Clubs of this type are most commonly publicized as a real estate investment group or company, rather than a club. The legal distinction according to the SEC is having 100 members or less. Whereas, a real estate investment group would normally have more than 100 investors. These clubs normally buy real estate or notes (loans originated by a licensed third party) to benefit from: cash flow, appreciation of assets, instant equity, tax benefits from deductions or qualified dividends, group buying power, monthly or daily compounding, higher liquidity and diversification of risk. Real estate transactions are limited to 35 participants to meet the legal requirements of many states for being closely held, and can be legally organized as a sole proprietorship transferring assets to a group living trust, limited liability company, limited liability partnership, general partnership or C corporation.

These clubs are often called incubators and are formed to purchase businesses that generate cash flow and equity. Investment types range from a group of people buying lower risk franchises with at least two years of significant revenues and positive cash flow like major fast food franchises, gas stations and hotels to higher risk businesses without an income history like start-ups, inventions, or product patenting and prototype development.

Hybrid clubs are a combination of two or more of the above types of investment clubs. Typically, real estate investment clubs are lower in risk and provide higher returns of 21% to 70% than stock, mutual fund or bond investment clubs due to the ongoing need for housing and population growth. Business investment clubs have about equal risk when compared to stock, mutual fund or bond investment clubs. However, business investment clubs have several additional benefits which include significantly higher returns and lower operating expenses measured by the net profit per year divided by the amount of cash necessary to purchase the business. Additionally, you can also hire yourself or family members to work in the business as employees.

A self-directed investment club is a type of investment club in which members do not make financial contributions, but rather meet on a regular or informal basis to share stock tips and advice, and then invest in their individual portfolios, not in a common club portfolio (as is more typical of investment clubs).[8] The phrase was coined by financial author and investment club expert Douglas Gerlach in Investment Clubs for Dummies.[9]

Investment clubs are normally unincorporated associations. Members’ contributions are converted into ‘units’ whose value rises and falls in line with the value of the underlying investments. The clubs are not taxed corporately, and members should account individually for their share of profits and capital gains.[10]

Investment clubs are generally formed as general partnerships, but could also be formed as limited liability companies, limited liability partnerships, corporations, or sole proprietorship that transfer real estate assets to a group living trust (similar to a family trust). While an investment club could incorporate, the double tax treatment on corporate distributions makes the corporate structure less desirable than a partnership except in the case when a C Corporation pays out qualified dividends after deducting allowable expenses. Typically, a general partnership does not generate any tax liability on its own; instead, any tax liability is passed through to members each year. However, income taxes are generally much higher than taxes on qualified dividends.

In order to understand the legal structure that an investment club should choose, the club should first understand its club type. Each of the different club types will have different legal requirements as well as different reporting requirements. Typically, the SEC only requires reporting for investment groups with over 100 members, which is reclassified as an investment group, not an investment club. Publicly held offerings like a Real Estate Investment Trust as known as a REIT also have additional reporting requirements.