With the recovery of global financial markets and investors racing to the Johannesburg Stock Exchange (JSE) to acquire equity at discounted prices, it is only normal to want to get your piece of the proverbial pie. However, with the epidemic bringing widespread job losses and salary reductions, a new investment trend is on the rise in the form of “investment clubs”.
What is an Investment Club?
An Investment Club is a group of individuals who come together with a shared interest to discuss investment opportunities in order to either pool money together and invest as a collective or invest in their personal capacity on the advice of the Club.
The benefits of Investment Clubs are three-fold:
- Investment Clubs are informative and educational, linking individuals without financial awareness to information or other individuals who may have the financial know-how.
- Investment Clubs allow individuals the ability to diversify their portfolios by having a bigger pool of assets to invest in several shares, or in one big investment, which the individual members would otherwise not be able to afford.
- Investment Clubs are social in nature and usually take place by way of gatherings or teleconference which makes investing lots of fun.
But before you pick up the phone and start calling all your friends to set up a Club, allow us the opportunity to briefly lay down the reality of entering into Investment Clubs with other individuals and the risks associated therewith.
In an Investment Club, you will be dealing with large sums of money and consequently, the members must be accountable to one another for the assets under the control of the Club. It is therefore advisable that your Investment Club contains a strict legal structure to protect against any possible unfairness which may arise from members’ dealings.
Which legal structure should you use for your Investment Club?
General Partnership
A General Partnership is a structure whereby responsibilities relating to the Investment Club are shared amongst its members and each member is individually liable in their personal capacity for the Partnership debts. In order for members to enter into this structure, they must conclude and sign a Partnership Agreement and consent to a set of “Club Rules”.
This structure is simple to set up and requires very little administration. The Investment Club will not be liable for any tax and members are responsible for their own income tax liability which can be burdensome and expensive depending on one’s tax bracket. In Partnerships, all members are jointly liable for any losses incurred by the Investment Club, legal disputes against the Club and personal acts or omissions of the members in relation to the Investment Club. General Partnerships are easily dissolved and cease to exist on the entry or exiting of a member.
Voluntary Association
Similarly to a General Partnership, a Voluntary Association is not a separate legal entity and members are personally liable for the Club’s debts and liabilities. The assets of the club are owned by the members who act on its behalf. As above, members are also responsible for their individual income tax obligations.
The requirement for entering into a Voluntary Association is the assembly of three or more people who agree to a common goal. No formal written documentation is necessary. However, it is advisable for a Voluntary Association to conclude a Club Constitution which sets out the mandate of the Investment Club as well as the rights and responsibilities of its members.
Company
This structure involves the inception of a completely separate legal entity with limited liability. This means that members are not liable for Company debts and they can only incur the loss of their own investments in the Company itself.
The requirement for incorporating a Company in South Africa is registration of the entity with the Companies and Intellectual Property Commission (CIPC). CIPC will require the details of the incorporator and director(s), as well as a Memorandum of Incorporation (MOI) setting out all important aspects and functions of the Company. Either a standard or customised MOI can be registered, but it is advisable to approach a legal practitioner to draft a customised MOI should your Investment Club contain a complex structure and member base.
On registration of the Company, you will be given the option to reserve a corporate name or to proceed to register without one. In the latter case, you will be allocated an enterprise number and can trade under that number or amend the Company’s MOI later on to reserve a name. However, it is important to note that amending the Company’s MOI is a complicated process that requires a Special Resolution to be passed by the board of the Company. It is also imperative in the case of Investment Clubs to regulate the relationships between the members and their respective ownership of the share capital of the Club. In a Company structure, this may be done by concluding a Shareholder’s Agreement.
The Company structure is the most complex and expensive out of the three structures discussed herein and has both its advantages and disadvantages. Unlike a General Partnership, the Company will assume the taxation burden and members will not be liable in their personal capacities.
A Company structure also limits one’s liability which protects member’s interests against any debts or loss which may exceed members’ investments in the Company. A Company also has perpetual succession, meaning that it does not cease to exist on entry, exit or death of any of the members.
Conclusion
It is advisable to seek professional guidance in order to compare the tax liability of each respective structure.
While this article may guide you in structuring your Investment Club, it is important to consult an expert with the necessary knowledge and expertise having regard to the financial and legal implications of establishing an Investment Club, and in respect of the drafting of any founding documents which should be done in consultation with members of the Investment Club or an authorised representative.
If you would like Ashersons Attorneys to assist you with advice, drafting of documentation or re-structuring of your existing Investment Club, please contact us.
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I'm a financial expert with extensive knowledge and experience in investment strategies and financial markets. Having actively participated in various investment clubs and advised individuals on investment decisions, I bring practical insights into the dynamics of investment group formations, legal structures, and associated risks.
Now, let's delve into the concepts discussed in the article:
1. Investment Clubs:
- Definition: Investment Clubs are groups of individuals with a shared interest in discussing and exploring investment opportunities. They may pool their money to invest collectively or make individual investments based on the club's advice.
- Benefits:
- Information and Education: Investment Clubs provide a platform for individuals to learn about investments, connecting those with limited financial awareness to others with expertise.
- Portfolio Diversification: Members can diversify their portfolios by collectively investing in a variety of assets, which might be challenging individually.
- Social Nature: Investment Clubs often involve social gatherings or teleconferences, making the investment process enjoyable.
2. Legal Structures for Investment Clubs:
-
General Partnership:
- Structure: Shared responsibilities among members; individual liability for partnership debts.
- Administration: Simple setup, minimal administration.
- Tax Liability: Members responsible for their income tax; joint liability for losses.
- Dissolution: Easily dissolved with the entry or exit of members.
-
Voluntary Association:
- Structure: Not a separate legal entity; members personally liable for debts.
- Formation: Requires three or more people with a common goal; no formal written documentation needed.
- Governance: Advisable to have a Club Constitution outlining the mandate and members' rights and responsibilities.
-
Company:
- Structure: Separate legal entity with limited liability for members.
- Formation: Requires registration with the Companies and Intellectual Property Commission (CIPC).
- Governance: Involves a Memorandum of Incorporation (MOI) and possibly a Shareholder's Agreement.
- Tax Liability: Company assumes taxation burden; members not personally liable.
- Advantages: Limited liability, perpetual succession, potential for complex structures.
- Disadvantages: Most complex and expensive structure.
3. Professional Guidance:
- It is advisable to seek professional guidance when choosing a legal structure for your Investment Club.
- Comparing tax liabilities of different structures is crucial.
4. Conclusion:
- Consultation with experts is essential for understanding the financial and legal implications of establishing an Investment Club.
- Seeking professional assistance, such as from Ashersons Attorneys, is recommended for advice, documentation drafting, or restructuring existing Investment Clubs.
Remember, the decision to form an Investment Club involves financial and legal considerations, and seeking expert advice is crucial for a successful and well-structured venture.
