Investment Clubs and Crowdfunding

One of the newest creations to be pitched across the internet is the hybrid models of Investment clubs blended into crowdfunding offers and paying royalties to the club members. This is a definitive “caveat emptor” because the securities laws are once again non-black and white in these matters. Investors need to tread very lightly over these specific new offerings, firstly these pools are created to take advantage of the small investor and syndicate money. This small investor is almost always a non-accredited investor and is usually defined as an unsophisticated investor. The opportunity to victimize large numbers of investors is fairly obvious in these situations. Are there legitimate investment clubs?
ABSOLUTELY.

The dangers here are the SEC rules as they apply to investment clubs. I have highlighted KEY portions of the law for you and your questions should be built around these points. As a member of the Advocacy Network we will always vet and complete this due diligence for you. For those who choose to be mavericks however, I hope this white paper and SEC highlights will help you avoid future victimization.

Are investment clubs regulated by the SEC?

Investment clubs usually do not have to register, or register the offer and sale of their own membership interests, with the SEC. But since each investment club is unique, each club should decide if it needs to register and comply with securities laws.
We'll discuss two securities laws that might apply to investment clubs:
• Under the Securities Act of 1933, membership interests in the investment club may be securities. If so, the offer and sale of membership interests could be subject to Federal regulation.
• Under the Investment Company Act of 1940, an investment club may be an investment company, and regulated.

When does an investment club have to register the offer and sale of its membership interests with the SEC under the Securities Act of 1933?

Since the Securities Act requires the registration of the offer and sale of most securities, the investment club must first decide if its membership interests are "securities." Generally, a membership interest is a security if it is an "investment contract."

Generally, a membership interest is an investment contract if members invest and expect to make a profit from the entrepreneurial and managerial efforts of others. (Determine who makes the investment decisions, if by the management or specific individual then the club should be registered)

If every member in an investment club actively participates in deciding what investments to make, the membership interests in the club would probably not be considered securities. If the club has any passive members, it may be issuing securities.
Sometimes offers and sales of securities do not have to be registered