Investment limit question
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Investment limit question We are hitting an issue in our club that I'm not sure how to address and would like some input. We started our club 2 years ago with 10 members. Through attrition due to lack of interest and the lagging economy, even with new members, our club is now down to only 6. Our original documents include the standard clause of limiting any individual member to no more than 20% of the total club portfolio. This month we have two of our 6 members that are at or slightly above that limit. My question is, should we stick hard and fast to this rule? Why is this rule been used by many investment clubs? I think I've heard the arguement that if one member gets to heavy (35%+) they begin to dominate the club feeling that they should have more of a say and even though it is one member one vote, other people can begin to sympathize with them and it can sway their vote, so to keep that from happening, that's why the 20% rule came about. With out current membership I don't really see that happening, so I personally would be OK if some members exceeded that amount. As teasurer I need to bring this fact up at the next meeting and I know that the discussion with them move to the need for this limit and I wanted some educated input from other clubs as to why we should or should not hold fast to this limit. Thanks. Bob Smyk Treasurer INsecurities Investment Club Hello Bob! I think you have a perfect understanding of the 20% rule. But it's not just about high-stake members wanting more voting power...it's also about high-stake members not wiping out the whole club when they pull out. I think it's a great rule, but there's another one! Majority rules! The great thing about partnerships is that you can change the rules anytime you want, as long as the majority agrees. Just remember, though, there's a reason why so many older clubs have this rule. Once you change it, it's hard to go back. Maybe they know something you don't yet! <G> Lynn Ostrem, Minneapolis garbagecop@foxinternet.net Robert Smyk wrote: >We are hitting an issue in our club that I'm not sure how to >address and would like some input. We started our club 2 >years ago with 10 members. Through attrition due to lack of >interest and the lagging economy, even with new members, our >club is now down to only 6. Our original documents include >the standard clause of limiting any individual member to no >more than 20% of the total club portfolio. This month we >have two of our 6 members that are at or slightly above that >limit. > >My question is, should we stick hard and fast to this rule? >Why is this rule been used by many investment clubs? I >think I've heard the arguement that if one member gets to >heavy (35%+) they begin to dominate the club feeling that >they should have more of a say and even though it is one >member one vote, other people can begin to sympathize with >them and it can sway their vote, so to keep that from >happening, that's why the 20% rule came about. With out >current membership I don't really see that happening, so I >personally would be OK if some members exceeded that amount. >As teasurer I need to bring this fact up at the next meeting >and I know that the discussion with them move to the need >for this limit and I wanted some educated input from other >clubs as to why we should or should not hold fast to this >limit. > >Thanks. > >Bob Smyk >Treasurer >INsecurities Investment Club > > > Bob... We ran into the same issue. When partners resigned, the remaining partners's share increased as a matter of mathematical proportions. We solved the issue by revising the rule, and though not perfect, it's been working. We adopted the following: 1. When any partner exceeds 20% equity, we allow any of the other partners to increase their permitted contributions above our ordinary dollar limit. Normally partners are limited to a $100 cap on monthly contributions but when any partner exceeds 20%, the other partners may elect to increase their contribtions to $200. 2. When a partner exceeds 20%, they MAY (but are not required) elect to suspend contributions until such time that they fall below 20%. 3. We may permit additional capital to be contributed by any partner not exceeding 20%. Overall, we did not want to penalize the partner exceeding the 20% limit because contributions ought to be encouraged and not discouraged. In addition, often the high ownership is a result of member turnover and not due to any specific fault of the person in excess. We also did not want to force a withdrawal of equity since that would not necessarily be in the best interest of the partners who might be forced to liquidate stock at an inopportune time. I don't recall whether we did anything else, but these options come to mind. For what it's worth, I don't find the cap particularly useful and can't find a valid reason for keeping it, unless your club votes based on ownership. We have rules where some votes are based on ownership equity and some are based on majority (one-person/one vote)... so some additional considerations were given to these circumstances in our partnership/by-laws modifications. John Munn Cross Country Investment Club |
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