<p>A college has an investment club run by college student who are majoring in finance. The club has made money in the current fiscal crisis. On a monthly basis for the benefits of the partners, the club lists their profit and losses statement and publishes where they have invested. Many former and current members have invested in the club. Many former club mebers are big wigs and are working in wall street.</p>
<p>Recently a big private outside donor group have contacted the investment club. After the research and due process, the investment club will provide the outside donor the advisory where to invest its money. This will be a pure advisory to the donor group. The final decision to invest or not invest still lies with the donor group. The money will be in the hands of the investors. Student group will never invest any private outside donor’s money themselves. </p>
<p>Since money invested is a huge amount, the investor’s lawyer is drafting an agreement letter. The student organization will not bear any financial responsibility if the donor group loses money in the investment process. However, if there is a profit, the student group will be given some percentage of the profit money. The invested money is a huge amount and will be a big incentive for the student group to get this kind of money and sharpen their investment skills. </p>
<p>The student group will maintain this profit or loss transaction on the advisory site provided the investors invest money. </p>
<p>What is the downside risk about sunning such an advisory? Does the student group need to hire a lawyer from the law school?</p>
<p>Presuming the partnership has its own entity and is outside the official auspices of this club, then the donor can make the profit contribution to the partnership. </p>
<p>You don’t make clear whose money the profit-share to the group belongs to, if it is made. Why is this profit-share a big incentive to the club? Are the individual club members going to profit personally from the profit-share? </p>
<p>The more the answers are “yes”, the more slippery the slope is. You don’t want to get into the club or its members being a for-profit entity, in all likelihood barred at the university, or taxes. If profit funds will flow to the investment club (for future investment), I would think it is vital that the agreement is structured so as NOT to make clear any funds are tied to performance- that they will be donations that would make the fund look like a lot of other college investment clubs- where the beneficiary ultimately is the university and the donor receives his tax deduction.</p>
<p>Frankly, I think investing with student groups is a terrible idea because the membership is so transitory, there is no continuity of process and it becomes much more likely stock selection devolves into a popularity contest. The need for fairly immediate gratification of the stock pickers and the tendency to take risk beyond the boring market index leads to the portfolio being an exercise in beta.</p>
<p>Watch out here…some college investment committee’s/clubs are non-profit, meaning they got a chunk of change from the school or an outside donor to invest. Being non-profit means you don’t get taxed on your investments…but it also means you can’t trade on the forex market or, of course, get paid for outside services.</p>
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<li>The outside partnetship is its own entity. All the investors in outside partnetship are not the current student at the college. None of the outside investors are active membrs in the investment club. Howver, two have kids who attend university but are not particiapting in the investment club at the university.</li>
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<li>Collge club profits were and are taxable. They issue profit and loss income statement and submit it to IRS. If the outside investors invest according to the plan, new profits may come in few tens of thousand - so it is a very big incentive. Profits will belonfg to the enire club and distributed equally among members. I am not sure how it will work out.</li>
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<li>As far as I know, Club is a for profit entity registered at the SEC. It has no formal link from the university just have student who goes to become wall street guys. It has been this way since last twenty plus years. </li>
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<li>Each outside investors are worth way over few million dollars. Why they are doing it, I have no clue. They told the students they have no clue in investing and they are looking the performace of the investment club and have SEC data on which they are making decisions.</li>
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<p>Just to be on the safe side, I’d have a lawyer review the contract and club charter to make sure there are no conflicts. </p>
<p>I know of another similar club where the university lets the Finance Club invest some of their endowment funds. They too have made money over the years, but I don’t know how well they’ve done over the downturn.</p>
<p>Oh, and I’m guessing anything given to the club will be 100% taxable and any expenses they incur should be deductible. There might be some SEC registration issues too.</p>
<p>Way too complicated - 3 different entities - unclear how the main investment club is incorporated, how the ownership is structured, involvement of a tax-free entity. I wouldn’t expect to get any useful advice on a board like this.</p>