We have a member who wants to remain a member without
withdrawing any money but also without making monthly
contributions. Our club seems willing to do this but is it
possible within the bounds of the bivio accounting. If we
just leave her as an active member not making monthly
contributions then she will be getting benefits of our
dividends earned. Is there any way to leave her as a member
with her contributions just sitting there but not giving her
any share of dividends earned??

Sherrill:

Before I provide an answer to your specific question, I feel
obligated to expand the discussion about the consequences of
what you are proposing.

First, there is a difference between the ability to make
some accounting entry to achieve a result and the legal and
business consequences of making that accounting entry.

Operating an investment club is regulated by the laws
relating to partnerships of the state where the partnership
is created and by federal laws dealing with securities.
While there may be times where state law allows "limited
partners" , there is not a category of "inactive" partner.
Even more restrictive are the laws and regulations of the US
Securities and Exchange Commission which prohibit "inactive"
or "silent" partners in investment clubs.

Second, I would then re-phrase your question to be "can we
have an active partner, who leaves his/her current
contributions plus accrued earnings/losses in the
partnership, but "freezes" the market value of that
partner's interest in the partnership.

Such an arrangement would result in the partner not
participating in the rise or fall in the value of that
partner's current interest in the partnership's assets. It
also means the other partners would profit from any increase
in value of the "frozen" partner's interest; but also have
to cover any loss that occurs to the "frozen" partner's
interest. Are you sure the person proposing to become a
"frozen partner" and the other partner's fully realize the
risk/reward that they would be assuming?

Third: As far as the pure accounting for such an
arrangement, I believe that nothing would have to be done
until the frozen member either withdrew or wanted to become
"unfrozen," or another member withdrew (hereinafter,
"triggering event"). While the value of the "frozen
partner's" interest in the partnership as reflected on the
Members Status would change, everyone would know that the
value has been frozen and to ignore that value on the
report. This approach would eliminate you having to make
adjusting entries every month. When a "triggering event"
occurs; at that time, you would have to determine the
difference between the current market value of the frozen
partner's holdings in the partnership compared with the
his/her value on the date of the freeze. If the new value is
higher, then an adjusting entry would have to be made that
reduces the market value of his/her holdings and increases
the value of the remaining partners. If the new value is
lower, then an adjusting entry would have to be made that
increases the market value of his/her holdings and reduces
the value of all the other members. The adjustments could be
accomplished using a series of entries using the "member
fee" and an suspense account so that the cash balances at
the bank/brokerage account stays the same. (The accounting
experts on this site may have an easier way to achieve this
result.)

Fourth: Final thought: You do not explain why the person
wants to do this. If it is that they do not want to (or
temporarily cannot) make additional cash contributions, then
simply allowing them stop making payments, but still
participating the gains/losses of their current holdings
would be best. They would still participate in the
management of the portfolio and in the risk/reward
attributable to their current holdings. If they are not
prepared to accept the risk/reward of their current holdings
going up or down, then it may be best for them to withdraw
entirely and seek to rejoin the partnership at a later date
when they are again willing to accept the risk/reward of
investing. I for one would not be willing to accept the risk
of insuring the value of another partner's interest in the
portfolio.

I am sure others will have additional thoughts to add that I
have not covered.

Jack Ranby
Grants Partners Investment Club


Sherrill Williams wrote:
> We have a member who wants to remain a member without
> withdrawing any money but also without making monthly
> contributions. Our club seems willing to do this but is it
> possible within the bounds of the bivio accounting. If we
> just leave her as an active member not making monthly
> contributions then she will be getting benefits of our
> dividends earned. Is there any way to leave her as a member
> with her contributions just sitting there but not giving her
> any share of dividends earned??

I did some research lately on the SEC inactive issue, and I agree with Rip.

An article called "Investment Clubs and the SEC" at www.sec.gov
implies that a club must file as a security if members expect to make
a profit from the entrepreneurial and managerial efforts of others.
These members, like mutual fund owners, don't have the privilege of
participating in the decisions of the portfolio. We, on the other
hand, are exempt because we have the right to vote on decisions of the
club, even if we choose not to.

I am always amazed at all gyrations clubs attempt to put themselves
through for a single member. It shouldn't be that way. Clubs are an
education vehicle. Members' lives change. We need to keep the best
interest of the club in mind and be willing to forego difficult legal
or accounting issues, for the good of the club.

--
Lynn Ostrem
garbagecop@gmail.com
Crow River Investment Club
www.bivio.com/crowriver

Join me at InvestEd 2010
August 6-8, Baltimore, MD
www.investor-education2010.org