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Hello to all,

I have a couple friends who want to give me money to invest. Can anyone give me some pointers on the legal implications of this?

1) Any comments on whether I need licenses (used to have series 6 & 63, now lapsed)

2) I would be taxed at my marginal rate, and the friends are content with me taking 30%/15% of the top of short/long term gains. Aslong as everyone fills out gift tax forms for the IRS, is there any other taxable implications?

Thanks in advance!
Trond
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Hello to all,

I have a couple friends who want to give me money to invest. Can anyone give me some pointers on the legal implications of this?

1) Any comments on whether I need licenses (used to have series 6 & 63, now lapsed)


You may need licenses. This is regulated at the state level. If you do need a license, a Series 6 license is not sufficient for investing directly in stocks.

2) I would be taxed at my marginal rate, and the friends are content with me taking 30%/15% of the top of short/long term gains. Aslong as everyone fills out gift tax forms for the IRS, is there any other taxable implications?

They're not giving you a gift...or if they are, it's a gift of the total investment principal and you are giving them a gift back of their net proceeds. Proceeding down this path will ultimately chew up all of your unified credits and subject your estates to unnecessary taxation.

Ira
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2) I would be taxed at my marginal rate, and the friends are content with me taking 30%/15% of the top of short/long term gains. Aslong as everyone fills out gift tax forms for the IRS, is there any other taxable implications?

A far better solution is for the accounts to remain in their names, and let them pay their own taxes. These are not gifts, as they are not giving you money unconditionally -- they expect to get it back.

As to licensing - you held those licenses before, don't you know what activities they covered? I would have thought that would have been part of the licensing exams.

--Peter
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I have a couple friends who want to give me money to invest. Can anyone give me some pointers on the legal implications of this?

You might try floating this question on the Liquid Lounge board, and search that board for previous threads on the same topic (it comes up a lot). A number of professional investment advisors hang out there.

1) Any comments on whether I need licenses (used to have series 6 & 63, now lapsed)

Generally speaking, if you collect any fees for this activity, you need to be registered, and being registered means passing for example the series 65. Generally speaking, if you are managing less than $25M, you will be regulated at the state level, and if more than that, at the federal level (i.e. by the SEC).

I say "generally speaking" because the laws vary by state, and there are some loopholes and "de minimum" exemptions that may apply to you. The applicable state laws depend on where you reside and do business and where your friends/clients reside. I would seek the advice of a lawyer familiar with these matters. Also, passing the series 65 will get you familiar with these laws and the ethics involved. Running afoul of the securities laws is probably not worth making a few dollars on the side.

2) I would be taxed at my marginal rate, and the friends are content with me taking 30%/15% of the top of short/long term gains. Aslong as everyone fills out gift tax forms for the IRS, is there any other taxable implications?

It sounds like you are talking about your friends literally giving you the money (i.e. writing you a check and you comingling the money with your own funds). This is highly inadvisable. Investing money for others is a highly regulated activity, and passing the money back and forth as gifts would not be looked upon very favorably by the regulators.

Better would be for your friends to open up brokerage accounts in their names, and, once you carry the proper credentials and set up a contract with them, give you trading authority on those accounts. That way they will each be responsible for their own taxes, and you will remain at arm's length from them.

Randy
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Thanks everyone for the responses.

A couple notes: series 6 and 63 covered mutual funds, so I have no idea waht is required on the stock side. (Although I believe the proper ones would be the 7 and 65?) Mostly mentioned it because I knew it might be an issue)

Thanks for the comments on state/federal regulation. I'll have to do some DD in the courthouse library. *sigh*

The second assumption is correct -- they were talking about just writing me a check. Their issues are that the amount of $ is not significant (in their eyes -- between $500 and $5000 each) and yet in a pooled manner it would be much more powerful.

Follow up -- what are the benefits and problems with creating a limited partnership? *grin*

Thanks!
Trond
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what are the benefits and problems with creating a limited partnership? *grin*

Benefits:
-accomplishes what you want to do
-might be thought of as an investment club (no one said all of the club members had to stay very active, did they?)

Problems:
-requires another tax filing
-complicates the partners' tax returns as well
-may or may not handle the securities licensing issues

--Peter
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what are the benefits and problems with creating a limited partnership? *grin*

Benefits:
-accomplishes what you want to do
-might be thought of as an investment club (no one said all of the club members had to stay very active, did they?)

Problems:
-requires another tax filing
-complicates the partners' tax returns as well
-may or may not handle the securities licensing issues


A limited partnership is more likely to be subject to SEC regulation than a general partnership. Investment clubs are almost always established as general partnerships. Nevertheless, IIRC investment partnerships with under 100 need not register with the SEC.

(NOTE: This requirement is independent of any requirement for the advisor to register.)

Ira
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Follow up -- what are the benefits and problems with creating a limited partnership?

This question comes up on the Liquid Lounge board regularly every few months. For example here are a couple of oft-quoted threads.

http://boards.fool.com/Message.asp?mid=18487501&sort=whole#18492668

http://boards.fool.com/Message.asp?mid=21869199&sort=whole

T
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Thanks all again for your comments, advice, and links. I appreciate the input!

Regards,
Trond
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