Start Investment Club - Investment Clubs and the SEC

Investment Clubs and the SEC

Does my investment club have to register with the Securities and Exchange Commission of the United States? This is a serious question and deserves as serious an answer.

Investment clubs usually do not have to register with the SEC. Generally, investment clubs are kept privately, even though they are listed in their taxes as limited partnerships, limited liability companies, or otherwise. There are a few criteria that must be met in order for an investment club to require SEC registration.

Individual Participation

As with all good things, there are darker sides to the formation of an investment club: the members who just won't participate, and the club goers who don't have the absentee members removed from the charter. If your investment club has any members who do not participate regularly in the goings-on of the club -- that is, if they do not contribute money enough to be considered a real member, yet reap some or all of the benefits of being a part of the investment group, your club has suddenly become a security.

If for some reason you discover that the person you don't know, the strange signature on the charter, is still withdrawing cash from the funds set up by the investment club, it will be prudent for you to bring this up with the group as a whole. Having too much sympathy for people who take advantage of you is consummately dangerous -- if the SEC takes a look at your book-keeping and sees this transgression, and also sees that your club is not registered as a security, there may be legal trouble ahead.

Other Reasons

Maybe registering with the SEC means that you are enjoying an amazing amount of success. We should all be so lucky to be a part of the investment club that has more than $25 million dollars under its management, which is one major factor in registering with the Securities and Exchange Commission. Such a sum of money may not be much more than a drop in the bucket in terms of the global economy, but from an individual perspective (and from the perspective of investment clubs, which rarely exceed 50 members), that is an enormous amount.

If your club is successful enough to draw in more than a hundred investors who sign in as members of the company, you will have to register with the SEC. Just the same, you will have to register the club if your company becomes strong enough to make a public offering on the stock market -- that is, if you can sell shares of the club to outside investors, and if you are listed on the stock exchange.

What Does Registration Entail?

When you are registered with the SEC, the club's president must make annual reports to the Commission. This includes the accounting books and a narrative discourse regarding the club's activities, plans for the future, and methods of investing. All of this is done to make sure that your holdings are fair and legal.

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