If you’re thinking about possibly starting your own investment club, you might want to read this document from the US Securities and Exchange Commission in order to determine if your club will have to register the offer and sale of its membership interests with the SEC, or if your club will have to register with the SEC as in investment company.

What is an investment club?

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

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.

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 because they are exempt under the law. For example, a non-public offering is exempt.

When does an investment club have to register with the SEC as an investment company 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 conditions 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.

For example, a "private investment company" may not need to register with the SEC. To qualify, an investment club

• must not make, nor propose to make, a public offering of its securities, and

   

• must not have more than 100 members.

How do you know if an investment club is making a public offering?

An announcement that a club is looking for new members might be considered a public offering, but this is determined on a case-by-case basis. An attorney with experience in securities law can help the club determine if its membership interests are securities, and if the club is making a public offering of those securities.

Do securities laws apply to a person who provides advice to an investment club?

If the adviser is compensated for providing the advice regarding the club’s investments, the adviser may need to register according to the Investment Advisers Act of 1940. Also, if one person selects 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.

Both the Investment Advisers Act of 1940 and many state laws do not require registration for advisers with a small number of clients.

Do states regulate investment clubs?

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.

To learn more about investment clubs or investing, visit your local library. You may want to contact the National Association of Investors Corporation (NAIC) website. This membership organization provides education for individuals and members of investment clubs.

For more information, read our publications, including: Invest Wisely: Advice From Your Securities Industry Regulators or Ask Questions.

If you have a complaint, send us your complaint by using our online complaint form. If you have a question, check our Fast Answers. You can also reach us at:

Securities and Exchange Commission

Office of Investor Education and Assistance

100 F Street, N.E.

Washington, D.C. 20549-0213

http://www.sec.gov/investor/pubs/invclub.htm

Notice from the SEC: "We have provided this information as a service to investors. It is neither a legal interpretation nor a statement of SEC policy. If you have questions concerning the meaning or application of a particular law or rule, please consult with an attorney who specializes in securities law."

Investment clubs, like many other things, offer much promise — if you successfully avoid a few obstacles. Lest any Fool be caught off guard by these obstacles, we offer some words of warning below.

The Pitfall of the Pernicious Co-Member

Know that people you meet online or offline may not always be what
they seem. This is far from merely a hazard of cyberspace — it’s even

been known to happen among friends. There’s always a chance that you’ll
end up with a dastardly, unscrupulous person in your investment club.
This is why, if your club is one that pools money and invests jointly,
it’s important to set up the club formally. Don’t neglect to draft
legal agreements and bylaws. Take some precautions. Perhaps set up your

systems so that two people have to sign off on any financial
transactions. This is important even if your club consists of family
members.

The Danger of Under-Delegation

This danger might seem less terrifying than the last one, but

experienced investment club members have asked us to stress it. As one
Fool noted: “Delegate, delegate, delegate… or you will be stuck with
most of the work.” Take note of your group’s dynamics and make sure
that the work is being shared by all. Anyone who isn’t contributing his
or her fair share may be enjoying the free ride and/or may be losing

interest because they’re not very involved. Anyone who’s taking on too
much may come to resent other club members and may burn out. Some might
be reluctant to volunteer because they’re not confident of their
stock-researching capabilities. Help these folks learn. It’s in
everyone’s best interest to get all members up to speed so that all can

contribute.

The Entanglement of Ennui

Over time, club members might start to lose interest. This can be
especially true if the market has been rising relentlessly (causing

people to doubt the need for a club when it seems that any monkey can
succeed in investing) or falling relentlessly (causing people to think
that success in investing is impossible to achieve). It can be due to a
club sticking to the same routine for several years, without injecting
anything new. Keep your club alive. Take the pulse of your members
(figuratively). Are they still excited to be in the club? Do you all

need a field trip or guest speaker to liven things up? If you ever feel
your club is in trouble, tap the experience and counsel of others in
our Investment Clubs discussion board.

The Jeopardy of Jelly Donuts

Club members can tire of the same snacks each month. Try new
treats. Perhaps refreshment duties should be rotated among all members.
Don’t let your fellow members fall into a “not-jelly-donuts-again”
stupor.

The Snare of Subterfuge

A club that isn’t paying attention might find itself derailed by a
member who has veered off toward unsound investing principles. Be
vigilant. If a member is all excited about some article that sings the
glories of technical investing, or a friend’s enthusiasm over a
particular penny stock, be careful. Stick to the fundamentals, such as

a company’s earnings, growth, competition, and future. Otherwise, you
might wake up one morning and find that your club’s portfolio has half
its funds invested in South American gold mining ventures!

The Booby Trap of Time

Investment clubs take time. Make sure that you and your fellow
members have the time to devote to it and are willing to devote that
time. If you figure about one to three hours for a monthly meeting and
two to four hours of research or work preparing for the meeting, that
comes to three to seven hours that you’ll have to commit each month.

This is probably manageable for most people, but make sure that
everyone has clear expectations. Broken up, it could be two or fewer
hours per week.

If this still sounds like a lot of time, consider the
alternative. If you want to invest successfully, you’re still going to

have to spend some time researching stocks and following companies
you’ve invested in. For many people, participating in an investment
club isn’t adding significantly to the amount of work they’d do anyway.
And remember that you also reap the benefit of the hours of work of
many other club members.

The Menace of Math

This may seem obvious and silly, but make sure that you’re
performing your math correctly. An incredible example of what we mean
by this is provided by none other than the Beardstown Ladies.

Apparently, their impressive 20-something-percent average annual return
was kind of� wrong. It seems that when calculating their return, they
counted as appreciation all the dues they had contributed. Using such a
system, even if their investments returned zero percent, they would
still have sizable gains from the dues that were continually added to
the pile. This shouldn’t happen to you, though, if you’re paying

careful attention to your club accounting system. The National Association of Investors Corp. (NAIC) offers instructions and software on how to keep track of your contributions and gains — and bivio offers online club accounting.

If you’re worried about the math involved in investing itself,

don’t. Yes, there’s math involved in investing. But it’s pretty much
just good old addition, subtraction, multiplication, division, and
percentages. Calculus, trigonometry, and logarithms are not required.

The Hazard of Humorlessness

Keep things fun, fellow Fools! Remember the words of that great

investor of yore, Mary Poppins (if she invested, can you imagine her
being anything but great at it?): “A spoonful of sugar helps the
medicine go down.” Learning about investing isn’t as bad as swallowing
some bitter tonic, but it’s sure easier to do when you’re having a good
time. Never think that a sense of humor detracts from sound investing.

If you ever find yourself forgetting this rule, check out some of
Warren Buffett’s enlightening and amusing annual letters to his
shareholders — available at http://www.berkshirehathaway.com/letters/letters.html.

Article used in accordance with The Motley Fool’s reprint policy
Copyright © The Motley Fool. All rights reserved

The Motley Fool - www.fool.com

There are many steps involved in getting an investment club up and running, but fret not — most of them are relatively straightforward. We’ve summarized many of them below and we’ve also prepared a short book, "Investment Clubs: How to Start and Run One the Motley Fool Way," which offers a concise coverage of what you need to know. If you’re greedy for much more detail, check out the NAIC’s "Starting and Running a Profitable Investment Club" by Thomas E. O’Hara and Kenneth S. Janke.

Below is a list of steps to help you along. It’s fairly thorough, but isn’t set in stone. We’re mere Fools, remember, so we may well have left out a step or three. If you have any constructive feedback or suggestions, please share them on our Investment Clubs discussion board.

- Start talking with friends and see who’s interested. It’s best to gather a variety of people who will bring to the club a variety of interests, experiences, and perspectives. Once you find a few interested friends, let them invite a few of their own friends. Aim to form a club with roughly 10 to 15 members, give or take a few. Anything from 6 to about 20 is probably workable. Too few and you may have trouble accumulating funds to invest. Too many and you’ll have trouble having quality discussions and finding a place to meet.

- Don’t assume that you’re doomed if your group is composed only of utter novices. That can be a very good thing. Sometimes, if you mix in some sophisticated investors with novices, the sophisticates can get bored or frustrated, and the novices can get intimidated. Don’t doubt that a bunch of novices can tackle learning everything together. (Remember, you have a lot of resources to help you, such as the online community here at the Fool.)

- Distribute information about investment clubs to anyone who has expressed interest. Perhaps print out the material you’ve found here. You want people to learn what investment clubs are all about and think about whether they’re really interested.

- Gather all interested parties for a preliminary meeting. Meet to discuss (A) whether you have enough in common, (B) how you’ll be organized and run, and (C) whether people are still seriously interested in forming a club. The following items are things that you should try to agree on. It might be good to go around the room and get everyone’s thoughts on each of these issues.

- Make sure that you all have similar or compatible investing goals. If some people want to double their money in two years and then get out, that’s not only unrealistic, but also probably at odds with those who want to learn and slowly grow their savings.

- Agree on the amount of the monthly minimum contribution. You don’t have to set this as high as possible. Remember that this is a learning activity, and you can always increase the amount at a later date. Many clubs allow members to contribute more than the monthly minimum level if they so desire. Also, contributions to the club shouldn’t necessarily be the only investment you make. You might be contributing $25 per month to your investment club, but putting aside $150 per month for your personal savings and investing.

- To the degree that you can, agree on some common ground regarding a general investing philosophy and approach. As an example, perhaps you agree that Warren Buffett’s approach is one you’d like to incorporate or emulate. Maybe many of you believe in Foolish investing tenets. Perhaps some want to find significantly undervalued stocks, while others want to find high-flying stocks. Differences don’t necessarily represent a death knell, but it’s good to start out knowing how everyone feels. And besides, many investment styles are not diametrically opposed. Fools and Warren Buffett have much common ground.

- Agree on a set of common-ground references, instructions, tools, and/or readings. Dare we be presumptuous enough to suggest that the Motley Fool Investment Guide or the "13 Steps to Investing Foolishly" could be such references? (Yes, we dare!) Peter Lynch’s One Up on Wall Street, Beating the Street, and Learn to Earn are some other fine works. FoolMart has assembled a large group of books that pass Foolish muster — check them out!) You might even all agree to subscribe to a certain magazine, such as SmartMoney, or to regularly read the Fool’s news and commentary and its investing strategy portfolio reports.

- Agree on a regular meeting time, place, length, and format. One reason to try and keep a club size to no more than about 15 people is that it permits meetings to be held in living rooms. Another possibility is to seek out some other space, like a local library or church. A coffeehouse or local watering hole might also work. Perhaps a member has an available meeting room at his workplace. Decide when you’ll meet, and how often. Most clubs meet once a month. For the format, outline the various items of business you plan to cover at each meeting and allocate an amount of time for each. This will help you keep meetings running efficiently and prevent someone’s report from going on for an hour and dragging things out too long. Most meetings will probably last between one and two hours.

- Agree on snacks. Snacks can be a very important part of any meeting. In unfortunate situations, it might even be what meeting attendees look forward to most. Your club can choose to bypass snacks — or you can decide to take turns bringing donuts or cookies.

- You’ll need a name for the club. You can be straightforward and name the club after something like your geographical region, or you can be creative. Names that some clubs have used include: The Money Makers, The Small Wonder Investment Group, Blue Chips and Salsa, The Common Bond Investment Club, Common Cents, The Fortune Seekers, The Steady Plodders, The Live and Learn Investors, The Silk STOCKings Investment Club, Stocks and Bonding, Blooming Assets, Lady Investigators, The Hounds of Xemba, The Stockettes, Fortune Hunters, Dynavestors, and so on. One group of women named their club the Stroke of Luck because they all met at a doctor’s office. Their husbands had had strokes, leaving the women suddenly needing to take control of the family finances.

- We’ve covered a lot of ground so far. If this has taken a long while, you could close the first meeting and resume organizational discussions at the next. There’s no rush. Below are more (yes, more) things to settle as you set up your club.

- Agree on how you’ll be organized legally and operationally. The NAIC guide noted above and the Fool investment club book both include sample legal language for contracts and agreements. Some Fools online have also shared their agreements. (Scroll down to see links to them.) This might sound scary, but you should realize that your $20 or $50 initial contributions will be growing into a significant pile of wealth. You’ll need to have formal agreements in place to protect yourselves in case one member turns out to be a dastardly demon. Don’t neglect this paperwork issue. For your club to be recognized as a legal entity, there are forms to fill out.

- As part of the previous discussion, you’ll have determined how your club will be organized — or at least will have begun talking about it. Finish that now. Agree on what responsibilities there are, and what kinds of officers you’ll need to elect to take on these responsibilities. Clarify what the responsibilities of the officers, as well as club members, will be. (Remember that even regular, non-officer members have responsibilities.) Elect your officers in one of the first meetings. Typical clubs have:

• A president/presiding partner, who sets meetings, presides over them, and plans activities.
• A vice president/assistant presiding partner, who fills in when needed and might also run the education program.
• A financial partner/treasurer, who deals with the brokerage, buys and sells stock, and keeps records of the club’s holdings as well as each member’s share. (This needs to be a careful, detail-oriented, and responsible person.)
• A recording partner/secretary, who keeps minutes of each meeting, reminds members of meetings when necessary, and possibly mails out minutes to members who miss a meeting.
• Some clubs have a separate education officer, responsible for planning (with the input of the group) an educational program, which might include presentations, field trips, guest speakers, and assigned reading.

- Since you’re likely to be a Foolish club, though, you might come up with some more inspired names for offices. Some examples are below:

• Big Kahuna
• Not-Quite-as-Big Kahuna
• High Priestess of Learning
• Foofah of Finances
• Head Honcho of Minutes and Agendas
• Superintendent of Snacks

- Assign someone to look into choosing a broker. Some clubs have traditionally favored full-service brokers, who’ll provide some advice and guidance and perhaps even attend meetings on occasion. Contrary to this, Fools generally opt for discount brokers. Discount brokers may offer some research, but they won’t tell you what to buy or sell. Since in a club your group should be calling its own shots, you don’t need to pay hefty commissions to full-service brokerages. Discuss the differences between full-service and discount brokers and decide which you prefer. Consider taking advantage of the incredibly low commissions offered for online trading by discount brokers. Several are in the neighborhood of $8 or less per trade. Visit the Fool’s Discount Brokerage Center for more information about how to evaluate and choose a broker. You can actually sign up for an account there, too! (Do so and you’ll help support the sponsors who keep Fool.com free.)

- Decide on an educational agenda. This will naturally change a bit over time, as you become more sophisticated investors. But it’s important to start out with some kind of plan. Perhaps you want to take the first few months to learn how to read annual reports. If you’re already comfortable with that, you might delve into various valuation methods. Discuss topics of interest and set up a plan for learning. A good way to start this discussion might be to go around the room and ask members to say what big questions they have about investing that they’d like answers to. If members think this would be too embarrassing, you could all write down lists of these questions anonymously and then collect and discuss them. (No one should be embarrassed, though — your club should foster an open and unintimidating atmosphere.)

- Make a list of member interests and expertise. Here’s why. As you begin hunting for companies in which to invest, you’ll want to choose industries to study. As both Peter Lynch and the Brothers Gardner like to point out, it’s a great strategy to "buy what you know." (Actually, it’s probably best restated as "research what you know.") If you’re in the chemical business, you might volunteer to look into companies in that industry, choosing a few for a close look. If a member is an avid golfer, she might look into golf-related companies. It’s a good idea to make a list of the industries with which your club members are familiar. Even if someone’s only hobby is hitting the malls every weekend, that’s a great boon — he’ll be familiar with many retailers.

- Finally, agree to have fun and to keep your meetings friendly and cooperative. And please consider dropping us a note now and then with any experiences, suggestions, or even funny stories that you’d care to share. (Perhaps your group came up with some clever officer titles? Let’s hear ‘em!)

Article used in accordance with The Motley Fool’s reprint policy

Copyright © The Motley Fool. All rights reserved

The Motley Fool - www.fool.com

What Is an Investment Club?
Investment clubs have been around for decades, and tens of thousands exist in America today. They’ve been growing in popularity in recent years, partly due to the best-selling books by the Beardstown Ladies.

Members of investment clubs, often groups of friends or co-workers, typically meet once a month to discuss companies and make decisions about which stocks to buy and sell. At meetings they each contribute a small sum of money that is deposited in a joint account. Members take turns researching and reporting on promising companies in which they might invest or companies in which the club is already invested.

The National Association of Investors Corp. (NAIC), established in 1951, has set forth guidelines for running successful investment clubs. It urges members to:

• Invest money regularly, regardless of market conditions
• Reinvest all dividends and capital gains
• Buy stock in companies that are growing faster than most of their peers
• Diversify investments, not putting all the communal eggs into one basket

These guidelines are fully Foolish and quite sensible. (Of course, hang around Fooldom online and you’ll glean much more guidance. We run a bunch of real-money portfolios, modeling a variety of investing strategies for you.)

Successful investment clubs focus on learning as well as doing. There’s often an education officer elected and guest speakers invited. Club members seek to explore new ideas and discuss investing issues. One month a member might present her findings on the value of screening for low P/E stocks. Another month, a member might report on a book he read about a great investor like Warren Buffett or Ben Graham. In the early sessions of a club’s life, education components might be very introductory, covering how to read a balance sheet or an earnings report. A year or two later, the club might be learning new ways to value stocks or discussing an interview published with a successful equities analyst.

Investment clubs today hold a total of more than $175 billion worth of equities in their portfolios — rivaling the largest mutual funds. Each month investment clubs add more than $50 million. This is big business — and exceedingly Foolish, too.

Why an Investment Club?
Consider starting or joining an investment club if:

• You’re new to investing and are looking for a good way to get your feet wet.
• You’d feel more comfortable learning about investing with others than on your own.
• You have roughly $20 to $50 that you can invest through the club each month.
• You’ve been putting off learning about investing and sense
  that having a responsibility to the group would provide some
  much-needed discipline.
• You think it would be fun to have a group of people with whom to share company research and to discuss investing topics.
• Friends have gently suggested that it would be good for you to get out of the house once in a while.

Clubs aren’t just good for newcomers to investing, though. Also consider forming or joining a club if:

• You’re an experienced investor, but don’t have time to study as
  many companies as you’d like. (A dozen people studying and presenting

  one company per month result in 144 company reviews!)

• You’re confident in your investing decision-making, but you
  think it would help to be able to bounce thoughts of others and get
  some additional perspectives.

• You’d welcome the chance to learn from other seasoned investors who have expertise in areas you don’t know that much about.

Investment clubs serve as a terrific way for those new to investing

to learn more about it in a friendly group setting. Many people are
terrified of taking their first investing steps and clubs make this
relatively painless, as members cough up modest sums and invest
carefully together after deliberating over the pros and cons of any
action.

Many members eventually find that the clubs guide their own

personal investing. After a while, their equity in the pooled club
account may be relatively small compared with their separate personal
accounts. Club meetings will offer many good ideas of attractive stocks
in which to invest — and while the club may buy a few shares, members
often go home and buy more shares for their own accounts. You may not
have the time to research several stocks each month on your own, but by

participating in a club, you’ll share in the research of others and
have the extra bonus of a group setting in which to discuss investing
ideas and issues. Read some Fools’ thoughts on why they formed an investment club.

Joining an Existing Club
Most investment clubs occasionally seek new members. Perhaps a member
is moving away or is just unable to continue or — dare we say it? –
perhaps a member has passed on to the great stock market in the sky. At

times like these, new members may be invited to join.

You might expect that if a club’s account has grown
over a decade and its average member’s equity is in the thousands of
dollars that a new member would be expected to contribute a huge sum of
money in order to join. Not true. The accounting systems that most

clubs use permit new members to merely begin contributing the standard
monthly amount. Longer-term members will each retain bigger pieces of
the pie, and everyone’s piece is calculated according to how much was
contributed when.

Now that you might be all fired up at the prospect of joining
an existing club, we’ll hit you with some bad news. It can be hard to

find the right club that’s looking for a new member. Members of many of
these clubs probably already have some friends they plan to invite.
Your best bet might be to ask people you know whether they are in an
investment club, and whether they need or anticipate needing any new
bodies.

Alternatively, you can hit our message folders. Go to our "Folly in 50 States" area and post a message in your state’s folder saying that you’re looking to join a club. One more option is to head to bivio, where its "Connect" feature can help hook you up with others interested in starting a club.

Once you find a club to join, take the time to learn more about it before signing up. Consider questions such as the following:

• Do you get along with the other members? If many of them seem too

  quiet, loud, obnoxious, young, old, aggressive, meek, or wishy-washy,
  this might not be the best group for you.

• Do you have goals in common? Perhaps you’re risk-averse and
  want to invest in more stable blue-chip stocks, but they’re out to
  aggressively find volatile, quickly growing small companies.

• Is the regular contribution too steep for you? $60 per month,
  for example, means $720 per year. This can be a lot for some people.

• Do you have the same basic investing philosophy? If you’re a
  true Fool, you probably won’t want to belong to a club that relies

  mainly on technical analysis or that just looks for stocks that are
  going to split, or doesn’t do its own research, preferring to rely on
  the recommendations of gurus on television or in magazines. (Yuck!)

Look for a group where you’ll fit in.

That’s easier said than done, though. For many people, the best strategy is simply to start their own club.

Article used in accordance with The Motley Fool’s reprint policy
Copyright © The Motley Fool. All rights reserved

The Motley Fool - www.fool.com