Can Our Club Have Silent Partners?
Q. I am a member of an investment
club that is a member of NAIC. We have formed our bylaws and
philosophy based on their samples. One question has recently been
poised to our club: Can a member join as a silent partner, and pay a
monthly contribution without being involved in the monthly functions?
Since we were initially formed for the education and personal growth
of our members, we did not include this in our bylaws. Are their any
resources that address this issue of silent members?
A. There are two reasons why you
should generally avoid having silent partners in your club.
The first is a bit legalistic. As long as an investment club
operates within a specific set of guidelines, it doesn't have to
register as a security with the U.S. Securities and Exchange
As you may know, publicly-traded stocks and mutual funds must be
registered before they can be offered for sale to the public, as must
the people and organizations who are engaged in selling those
securities. The SEC looks at a couple of criteria to determine if a
security must be registered, such as how many investors are involved,
if the security is advertised for sale to the general public, and if
there are silent partners in the entity. This last point is important
in this case. It's possible that the SEC could look at a partnership
that allows silent partners and determine that it falls into the
category requiring SEC registration -- and that could be costly.
The second reason is practical. Investment clubs are built around
the idea that each member plays a part in managing the club, from
researching potential investments to managing the club's
portfolio. Club members learn about investing because they are
actively investing in a real portfolio. Silent partners don't get the
benefit of this education; in fact, they benefit solely from the work
done by active members. I would even go as far as to call silent
partners freeloaders! After all, if all the club members were silent
partners, the club would never get anything accomplished.
I think it's best to require all club members to be active, both
for your sake and for theirs.