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l-C II - '-0ACTU ,ITED STA.TESSECURITiES N,m EXCHANGE COMMISSION SETIOiJ-'(A)( I)RULlJWASHINGTON. D.C. 20549PUBLIC 7 0 J¿¡ /.vISfON OFNvESTMENT MANAGEMENTAVAILABILIT I i ( pJuly 3, 1996"Mr. Frank MasonDear Mr. Mason:This letter is in response to your letter dated June11, 1996, requesting information regarding registration ofan investment club with the Securities and ExchangeCommission ("Commission"). You also request informationregarding the formation of a mutual fund.The initial question that must be considered is whetherthe proposed investment club has an obligation to registerwi th the Commission as an "investment compan ,' under theInvestment Company Act of 1940 ("1940 Act") . Generally,most investment clubs are not required to register asinvestment companies, either because the club does not issueinterests that are "securities," or because the club'smembership interests are privately offered and are held bynot more than one hundred persons. .An investment club will be required to register underthe 1940 Act only if (1) the club invests in securities, (2)it issues membership interests that arethemselvessecurities, and (3) no exclusion from the definition ofinvestment company is available. Assuming that the proposedinvestment club will invest in securities, the next questionto be addressed is whether its membership interests arethemselves securities.A membership interest in an investment club would be asecurity if it is an "investment contract." To determinei Section 3 (a) (1) of the 1940 Act defines "investmentcompany" as "any issuer which is or holds itself out asbeing engaged primarily, or proposes to engage primarily, inthe business of investing, reinvesting, or tradingsecurities. " The term "issuer" is defined in section2 (a) (22) as "every person who issues or proposes to issueany security, or has outstanding any security which it hasissued. "
.Mr. Frank MasonJuly 3, 1996Page 2whether an investment contract exists, we look to the"presence of an investment in a common venture premised on areasonable expectation of profits to be derived from theentrepreneurial or managerial efforts of others." If everymember of an investment club actively participates inmanaging the club, the membership interests in the clubwould not be securities because each member would not relysolely on the efforts of others. Therefore, the investmentcl ub would not be an investment company subj ect toregulation under the 1940 Act. However, if the club "consisted of even a few passive members, it may be issuingsecurities.Even if the club's membership interests are securities,many clubs rely on the "private investment company"exclusion from the definition of investment company.Section 3 (c) (1) of the 1940 Act excludes from regulation anyissuer that is not making and does not propose to make apublic offering of its securities and whose securities are3owned by one hundred or fewer shareholders.I haveenclosed for your information a copy of the Commission'sInvestment Company Registration Package which includes aCo misslon release discussing when a public offeringexists.If, however, you wish to form a mutual fund and offerits shares to the public, you will need to comply with therequirements of the 1940 Act and the Securities Act of 1933("1933 Act"). A public mutual fund must register as aninvestment company with the Commiss.ion under the 1940 Act,and if it is publicly offering its'securities, must registerthose securities under the 1933 Act. The 1940 Act, amongother matters, limits transactions between an investmentcompany and its affiliates, contains provisions that governthe company's capital structure, and sets forth requirementsregarding the composition of the company's board ofdirectors and the purchase and redemption of the company'sshares. The 1940 Act also requires that an investmentcompany have a net worth of at least 100,000 in totalassets before it can offer its securities to the public.The enclosed Investment Company Registration Packageincludes additional information on investment company2United Housinq Foundation, Inc. v. Forman, 421 U.S. 837,852 (1975).3In your letter, you refer to an investment club with morethan twenty-five members being required to register with theCommission. As noted above, the 1940 Act specifies that thelimit on the number of investors in a private investmentcompany is one hundred, not twenty-five.4See Securities Act Release No. 4552 (Nov. 6, 1962).
Mr. Frank MasonJuly 3, 1996Page 3regulation as well as the form that must be filed toregister.You should also be aware that a person selecting the.investments for a registered investment company generally isrequired to register as an investment adviser under theInvestment Advisers Act of 1940 ("Advisers Act"), and that aperson selecting investments for an investment club may alsobe required to register as an investment adviser. Section202 (a) (11) of the Advisers Act generally defines an "investment adviser as "any person who, for compensation,engages in the business of advising others, either directlyor through publications or writings, as to the value ofsecurities or as to the advisability of investing in,purchasing, or selling securities, or who for compensationand as part of a regular business, issues or promulgatesanalyses or reports concerning securities."Section 203 (a) of the Advisers Act requires aninvestment adviser to register with the Commission unlessexempt from registration under Section 203 (b) of theAdvisers Act. Section 203 (b) (3) exempts from registrationany investment adviser who, during the course of thepreceding twelve months, has had fewer than fifteen clients,does not hold himself out to the public as an investmentadviser, and does not act as a investment adviser to anyregistered investment company. Any person that meets thedefinition of investment adviser, regardless of whether ornot he is required to register, must comply with theantifraud provisions of the Advisers Act. I have enclosedwith this letter a copy of the Commission' s InvestmentAdviser Registration Package, which discusses the definitionof an investment adviser in more detail, and contains theforms necessary to register as an investment adviser shouldyou determine it necessary to do so.In addition, you should contact the appropriate stateauthority (or authorities) to determine what, if any, staterequirements may apply to your proposed activities. Thenames and addresses of appropriate state officials can beobtained by contacting the North American SecuritiesAdministrators Association, Inc., One Massachusetts Avenue,5A person holds himself out to the public as an investmentadviser if, among other things, he uses such terms as"investment adviser" or "investment manager" on hisstationery or in a business or telephone directory, or letsit be known, by word of mouth through existing clients orotherwise, that he is willing to take on new advisoryclients. George J. Dippold (pub. avail. May 7, 1990).6See Section 206 of the Advisers Act.
Mr. Frank MasonJuly 3, 1996Page 4N.W., Suite 310, Washington, D.C. 20001, Telephone: (202)737-0900. Due to the complexity of investment company andinvestment adviser regulation, you also may wish to consultwith an attorney familiar with this area before proceeding.I hope that you find this information helpful. If youhave any further questions, please contact this office at(202) 942-0659.sinCZ ay LambaLaw ClerkEnclosures
June 11, 1996Securities Exchange CommissionOffice of Chief CouncilDi vision of Investment Management450 Fifth St. NWWashington, DC 20549To Whom It May Concern:If this is not addressed to the correct office, please forward it to theappropriate office. Thank you.I am requesting information on two issues.1) I have been informed that investment clubs with more than twenty-fivemembers need to be registered with the SEC. Please provide me with thenecessary information so that I can comply.--2) I am interested in exploring the formation of a mutual fund. Please sendthe information detailing restrictions and regulations and the necessary formsfor registration.Thank you.Sincerely,r¡ (Y Frank Mason
If, however, you wish to form a mutual fund and offer its shares to the public, you will need to comply with the requirements of the 1940 Act and the Securities Act of 1933 ("1933 Act"). A public mutual fund must register as an. investment company with the Commiss.ion under the 1940 Act, and if it is publicly offering its' securities, must register
