As we move rapidly through the year 2021. We must never forget the power of collective capitalization of pooling money together. It clearly is one of the best ways to grow money, investments, relationships, belief, complete goals, and obtain success. Before we dive into the types of Investment Clubs, let’s make sure you first understand what an investment club is, its history, and recommendations on Getting Started.
INVESTMENT CLUB
An investment club is a group of individuals who meet for the purpose of pooling money and investing; members typically meet on a periodic basis to make investment decisions as a group through a voting process and recording of minutes, or gather information and perform investment transactions outside the group. In the US, the upper limit for the value of an investment club’s worth is $25m. There is no lower limit. Investment clubs provide members a means to learn about markets while meeting and working with people who have similar interests.
HISTORY
Although people have been investing in groups for thousands of years, the world’s first investment club was allegedly established in Texas in 1898 back in the days of the Wild West when few investments could be considered safe. Investment clubs were seen as an ideal way of spreading the risk – away from just cattle.
While the first investment club on record dates back to the 1800s in Western America, Various online communities devoted to this type of investing have recently emerged and have contributed to the personal investing boom in the United States. One of the reasons that people come together in investment clubs is to learn how to invest. In Britain, investment clubs took off in the 1950s, but the rate of formation fell at the time of the 2008 financial crisis.
STARTING AN INVESTMENT CLUB
Industry observers recommend prospective members adhere to these guidelines:
- Consult a tax adviser on the taxation implications of the club’s selected legal structure.
- Establish an investment mission, policy, and goals that allow active participation before investing.
- Draw up a written operating or membership agreement covering asset management rules and membership changes.
- Evaluate fees for different tools and platforms to maximize returns.
- Focus on learning and making money.
CLUB TYPES
HIGH SCHOOL EXTRACURRICULAR INVESTMENT CLUBS
This form of investment club usually meets to develop an interest in investing and the intricacies of investing for minors, usually high school students. They typically are led by an adult who has vast experience in professional investing.
STOCK, MUTUAL FUNDS, OR BONDS INVESTMENT CLUBS
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 vote.
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.
REAL ESTATE INVESTMENT CLUBS
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 fewer. 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.
BUSINESS INVESTMENT CLUBS
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 INVESTMENT CLUBS
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.
