By: Delleon McGlone & Joy Batra
Since launching Syndicate’s first product earlier this year, we have witnessed an explosion in investment clubs. As some may know, investment clubs launched on Syndicate can invest in on-chain assets (tokens and NFTs) or, if the club is accredited, they can also invest in off-chain (startup equity).
In the Syndicate discord, we have regular discussions with our community members about their investment clubs, connecting with external experts (lawyers, accounts, and tax advisors), and the do’s and don’t of launching an investment club. Syndicate’s guidebook provides guidelines for launching and establishing investment clubs. Here are a few things to keep in mind as you set up your investment club, plus a friendly reminder to always seek advice from counsel in your jurisdiction.
What is an Investment Club?
The SEC’s website defines an investment club as a group of people who pool their capital and make investments together. Here are some more characteristics of investment clubs:
- Up to 99 members (individuals)
- All members must actively participate in investment decisions
- No performance fees (a.k.a carry)
- No public solicitation
- Must not make, nor propose to make, a public offering of its securities
- If investing in startup equity, club members must be accredited
- No transferability of tokens or membership
- Responsible for following all applicable laws and tax obligations
All Investment Clubs are not created equal
Who are the club’s members and how do they work together?
Every investment club on Syndicate has two types of members: admins and non-administrative members.
The admin is the person (or people) who creates the investment club. Admins are club members who participate in investment decisions and also do administrative functions for the club like managing the club's wallet and settings and helping members enter or leave the club.
Non-administrative members are participants in the club who contribute funds and help make decisions on investments but are not expected to do ongoing administrative work for the club. In our current product, only individuals (as opposed to companies or DAOs) should be members of investment clubs.
Investment clubs can share ideas amongst members, learn together, increase buying power, share risk, and reduce transaction costs.
Investment clubs are generally not regulated by the SEC. If a club has more than 99 members, then it may not be considered an investment club anymore. It might be another vehicle that the SEC does regulate, which would have additional registration and compliance requirements. Your legal and tax counsel can help you navigate this if it applies to you.
Governance is a requirement of all clubs because every member who has allocated capital to the club should have voting rights and decision-making power in each investment. The governance structure is flexible and can be decided collectively by the club members.
The most asked question from our community is how can they input carry and management fees or why can’t their investment club have carry or management fees. Our product does not currently allow investment clubs to have carry because of the risk that if someone (such as the club admin) is paid for providing advice about the club’s investments and/or selecting investments for the club, that person may be considered an investment adviser. According to the SEC, unless an exemption applies, an investment adviser must register with the SEC and any applicable states. Even if an investment adviser is exempt from registration, the antifraud provisions of the Advisers Act still apply.
How do clubs raise money?
Investment clubs are meant to be small groups of people pooling their capital toward things they care about. One way the investment club stays small is because of a hard limit on the number of members, as mentioned above. A second way is because investment clubs are not allowed to publicly solicit for money or members. Instead, they should find members privately.
What is public solicitation? It varies depending on the specific situation, but things that are more likely to be considered public solicitation include: a public website, tweet, or post that might suggest a club is looking for new members or money. Public solicitation can also include ads, or seminars where attendees have been invited by general solicitation or general advertising. It’s always best to check with an attorney licensed in your jurisdiction who has experience with securities law because the definition is so context-dependent.
What can clubs invest in?
So far, investment clubs launched on Syndicate have invested in tokens, NFTs, startup equity, real estate, art, collectibles, and DAOs. Most of the on-chain assets clubs invest in, like tokens, are available to unaccredited investors.
Some assets, like startup equity, are only available to accredited investors except in rare cases. One exception may be when the startup equity is regulated under the JOBS Act. The JOBS Act allows retail or non-accredited investors to invest in startups that qualify as Regulation A offerings and have done the corresponding legal and compliance work to accept retail investors. In the vast majority of cases, startups are too tight on cash or focused on building their products to go through this process. This means that either the club or all of its members must meet the SEC’s definition of accreditation in order to invest in most startup equity.
At Syndicate we take our mission to democratize investing seriously and are always looking to give people who have been excluded from the traditional financial system more opportunities to build wealth and fund what matters to them. Join our Discord or follow us on Twitter to get the latest updates, and please let us know what you think!
This overview is provided for informational purposes only and is not intended to constitute legal, financial, tax, or other advice. You should not act or refrain from acting based on any information in this overview. Please check with your legal and tax advisors to make the best decisions for your specific circumstances.