Back to Basics – Investment Club Rules

What is an Investment Club? 

    • A group of people who pool their assets to make investment decisions. Typically, members communicate regularly to discuss opportunities and educate each other.

The key components of an investment club are: 

    • Collaboration – Members perform individual research and then provide updates to the rest of the group to help make informed asset allocation decisions.
    • Democracy – Each member usually has an equal vote in decision-making processes, regardless of the amount they have invested in the club’s pool.
    • Investment Strategy – The club collectively develops and investment strategy that fits the goals and risk tolerance of the group.
    • Legal Structure – The Club can be formed informally or as established as a legal entity such as an LLC. The formality of creating a Limited Liability Company formalizes operations and provides individual members protection from the club’s debts and legal issues.
    • Education – Clubs often focus on educating their members about the market.
    • Financial Contribution – Members contribute a set amount of assets to the investment pool.
    • Participation – Florida does not limit the number of members in an investment club, but typically they are 10-20 members. If the club exceeds 100 members, it will be required to file as a “large company” with the IRS.
    • Assets under management – Investment Clubs must stay below $25 million in assets to avoid additional regulations, such as SEC and FINRA registration under the Investment Companies Act of 1940, unless exempt. Managers with over $25 million in assets face Investment Adviser Act registration requirements. Those managing $25-$110 million might need state securities authority registration, pending exemptions.

Recommendations for a Crypto or Art-focused Investment Club

    • Form the LLC – it’s better to have the formality of the LLC, along with the protection and the clarity for taxes.
    • Jurisdiction – Florida has the best laws and taxes for investment clubs (I may be biased since it’s where I’m licensed to practice law).
    • Operating Agreement – Opt for a framework in which every founding member serves as a manager, ensuring parity in contributions, voting privileges, and profit sharing. Specify procedures for member induction or removal, approving expenses, among other operational aspects.
    • Participation – Cap at 20 members and $24 million AUM. This size allows for diverse opinions yet remains small enough to manage administratively and to allow for meaningful participation by all members.
    • Quarterly Meetings – document profits and losses and taxable distributions and any issues that were voted on. (,,Template link).
    • Compliance Program – The Club should have formal Anti-money laundering and OFAC policies and designate a compliance officer.

Steps to Establishing an Investment Club

Initial Setup:

    • Corporate Formation: Register with the Secretary of State to legally form your investment club as a business entity, such as an LLC, to provide members with limited liability protection.
    • Operating Agreement: Draft a comprehensive operating agreement detailing the club’s structure, member responsibilities, investment strategies, and distribution policies.
    • Employer Identification Number (EIN): Obtain an EIN from the IRS for tax purposes and to enable the club to open a bank account.
    • Investment Strategy Statement: Develop a clear statement that outlines the club’s investment philosophy, goals, and the criteria for selecting investments.
    • Compliance Policies: Establish Anti-Money Laundering (AML) and Office of Foreign Assets Control (OFAC) policies to ensure regulatory compliance.
    • Membership Agreement: A simple agreement that outlines the expectations and obligations of each member.

Quarterly Requirements:

    • Financial Reports: Prepare and review a detailed financial report each quarter to assess the club’s performance and make informed decisions.
    • Tax Filings: Ensure timely quarterly tax filings to comply with IRS regulations, including estimated tax payments if applicable.
    • Managers Meeting: Hold a quarterly meeting of the club’s managers (or all members if the club operates democratically) to discuss performance, potential investments, and operational issues.
    • Meeting Minutes: Document the discussions, decisions, and action items from the quarterly meetings for legal records and member reference.
    • Educational Component: Incorporate an educational segment in each quarterly meeting to enhance members’ investment knowledge and skills.

Closing remarks. Investment clubs offer a unique opportunity for individuals to pool their resources and knowledge to navigate the complexities of the crypto investment landscape. Remember, the key to a successful investment club lies not only in the financial gains, but in the collective wisdom and friendships cultivated along the way.

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