Investment Strategies

Table of Contents

• SEC Laws That Might Apply
• When Registration Is Required Under the Securities Act of 1933
• When Registration Is Required Under the Investment Company Act of 1940
• Applicability of the Investment Advisers Act of 1940
• Applicable State Laws

An investment club is a group of people who pool their money to make investments. Usually, investment clubs are organized as partnerships. After the members study different investments, the group decides to buy or sell based on a majority vote. Club meetings can be educational in nature, and each member may actively participate in investment decisions.

SEC Laws That Might Apply

Investment clubs do not usually need to register, or to 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 subject to regulation.

When Registration Is Required Under the Securities Act of 1933

Since the 1933 Securities Act requires registration of the offer and sale of most securities, the investment club must register 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.

Tip: If every member in an investment club actively participates in deciding which investments to make, membership interests in the club would probably not be considered securities. On the other hand, if the club has any inactive members, it may be considered to be issuing securities.

Sometimes offers and sales of securities do not have to be registered because they are exempt under the law. For example, a non-public offering is exempt.

When Registration Is Required Under the Investment Company Act of 1940

An investment club must register with the SEC as an investment company under the Investment Company Act of 1940 if all of the following three apply:

1. The club invests in securities,
2. The club issues membership interests that are securities (see above), and
3. The club is not able to rely on an exclusion from the definition of "investment company."

Example: A "private investment company" may not need to register with the SEC. To qualify as a private investment company, an investment club:

• Must not make, nor propose to make, a public offering of its securities, and
• Must not have more than 100 members.

An announcement that a club is looking for new members might be considered a public offering, but the analysis is made on a case-by-case basis.

Tip: An attorney with experience in securities law can help the club determine whether its membership interests are securities, and whether the club is making a public offering of those securities.

Applicability of the Investment Advisers Act of 1940

If an adviser is compensated for providing advice regarding the club's investments, the adviser may need to register under the Investment Advisers Act of 1940. Also, if one person chooses investments for the club, that person may have to register as an investment adviser.

In general, a person who has $25 million or more in assets under management is required to register with the SEC under the Investment Advisers Act of 1940.

A person managing less than $25 million may be required to register under the securities laws of the state or states in which the adviser transacts business.

Neither the Investment Advisers Act of 1940 nor many state laws require registration for advisers with small numbers of clients.

Applicable State Laws

State securities laws may differ from federal securities laws. To learn more about the laws in your state, call your state securities regulator. To get the telephone number for your state, visit the North American Securities Administrators Association (NASAA) website.

Tip: It is a good idea to seek the advice of a securities attorney or to contact the securities regulator for the state in question before getting involved with an investment club.