Adapted from: http://www.wikihow.com/Start-an-Investment-Club
A local investment club differs from a regular investment club in one very important way: a local club invests in local small businesses by offering low interest loans, while a regular investment club trades in stocks and bonds on Wall Street.
1 Find potential members for your club. US Security and Exchange Commission (SEC) law attempts to protect unaccredited investors (those of us who have a net worth of less than $1,000,000 or annual incomes of less than $200,000) from “risky” investment opportunities. Thus, they prohibit soliciting the general public for investments but state that you can solicit friends and family. So, your investment club must be consist of people who have “preexisting relationships” (ie, each person has to have known someone else in the group prior to joining.
Members can be local, so you can meet in person, or they can live far away and you can meet online. Aim for a club with 10-15 members, but anything from 6-20 is workable–when you have fewer people, you might have trouble getting enough funds together to invest; and with a large group, maintaining quality discussions and finding a place to meet both become concerns.
2 Hold a preliminary meeting. Get together with the people who are interested, provide snacks and refreshments, and discuss the formation of a club:
- Definegoals. Are people more interested in supporting local businesses than a high rate of return? Are people interested in long-term, slow-money types of investments?
- Determine how much each member can contribute financially on a monthly basis. Is this consistent with your goals?
- Some clubs make the initial contribution higher to ensure commitment.
- fail to show up, or pay on time.
- If people make different contributions, their returns can be in proportion to that.
- You can either pool your investment dollars and invest together (traditional) or invest through individual accounts (self-directed).
- This is also a good time to judge whether you really want to invest with these people: Are there people who:
- fail to pull their own weight (and a club that allows them to stay.)
- only have a mild interest and therefore do not participate regularly.
- fail to choose an investing strategy and stick with it.
- fail to respect that the club is a business.
- fail to seek means to keep it interesting and focused on solid investment education.
- will allow somebody else to do all the work.
- fail to expect flawless record-keeping
- too much finger-pointing going on when facing an unprofitable investment or missed opportunity
3 Hold an organizational meeting to iron out the details. Have another get-together with the people who are still interested and discuss the following:
- Decide when and where to meet (living rooms, local library, church, coffeehouse–depending on size of group). Meetings should last 1-2 hours.
- Define roles within the club (president, secretary, treasurer, investor) – what are their responsibilities? The terms should be one or two years, and the treasurer should have an assistant who can move up later. Appoint individuals to roles.
- How will the club manage payouts, divestiture (reducing assets or investments) or dissolution?
- What are the policies on gaining new members? What about when a member wants to leave the club?
- What will be the name of the club?
4 File the necessary paperwork.
- Develop club operating procedures, or operating agreement. This will outline all the policies discussed in the previous meeting, and should be signed by everyone in the group. There are sample contracts and agreements online. Check out http://www.nosmallpotatoesinvestmentclub.com/ for sample documents.
- If you’re setting up an account with a bank or credit union, you’ll probably need Articles of Incorporation or a Partnership Agreement in the US. In Washington State, visit the Secretary of State Corporations page, http://www.sos.wa.gov/corps/ and click on “start a business” page. We filed as an LLC. To complete this form you will need everyone’s name and address.
- If necessary, apply for an Employer Identification Number (EIN) and file a “Certificate of Conducting Business as Partners” form. Visit http://www.irs.gov/uac/Form-SS-4,-Application-for-Employer-Identification-Number-(EIN) to download the form.
5 Open a bank account. We recommend supporting your local credit union. You should get a commercial account and encourage your members to make automatic monthly deposits into the account.
6 Develop a marketing strategy. Local investment groups are fairly new and people in your community may not be familiar with them. You will have to spend some time and effort letting local businesses know you are an option to consider when they are seeking a loan.
7 Develop an educational agenda. In many cases, investment clubs, particularly local investment clubs, are formed by people who are learning about investing, and not everyone is on the same page in terms of their knowledge base. Ask each member what big questions they have about investing that they’d like answers to (having them submit questions anonymously is also an option) and then discuss which topics you’d like to review as a group. Make a “syllabus” and decide who will be doing the research and presenting the topic to the group.
8 Invest as a group based on your regular meetings (usually once a month).
- Review club financials (overall gains or losses, individual investment progress and cash balance available for investment).
- Do presentations on various topics.
- Discuss/decide how to invest.
Tips
- Trust has to be established for the club to be effective.
- When an investment goes wrong, use it as a learning experience and go back to the drawing board to change things if need be.
- Don’t invest immediately. Give the group several months of just depositing money. This will weed out those who won’t really remain involved or can’t afford the club. It will also help you get to know each other better.
Warnings
- Beware that there can be too many emotions going on within an investment club:
- When things are going great, protagonism and greed might take over
- When things are going bad, animosity, blame, and distress can shadow over the club
- Make sure that everyone understands that they might take a risk by investing because not all investments will be profitable.
- Some members may want to embezzle funds. This is why having an operating agreement and ironing out the details is important.
- Proper planning, a supportive group, and an understanding leader might be needed to keep the cohesion and optimism of the group
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