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What is an Investment Club?

An investment club can be a term used for a group that organizes itself for the purpose of pooling investment dollars and participating in the market, or for a group that meets for informational and educational purposes.

Clubs that actually invest sometimes organize themselves as LLCs and establish a system for how to choose and manage their investments as a group. Even though “investment club” may sound like an informal and relatively unregulated way to invest with pooled assets, they are actually subject to regulation by the SEC.

When clubs form into entities and the percentage of interest that each partner owns is potentially available for sale, or some of the partners are passive investors who are not actively involved in the selection and management of the investment portfolio, then the membership shares will be deemed securities, and the operation will be subject to SEC regulations.

The club may also be considered an investment company, per the Investment Company Act of 1940, if it has more than 100 members, or offers interest in the club’s investments to the general public. Private placement falls under Regulation D and is exempt from SEC regulation.

Investment clubs can be organized as LLCs, which allows taxes for gains or losses to pass through to the investors. The club also might establish a trust and trustee to give the club a layer of design and protection that they believe will be beneficial.

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Keywords: investment, Securities and Exchange Commission (SEC), Regulation D, private placements, Investment Company Act of 1940,