For centuries, group investing has been a key ingredient in building wealth. I recognized early in my journey that earning a college degree, securing a steady W-2 job, and contributing to my 401(k) would only get me so far. I was participating in a big world of investing as an individual, but real investors “played” as a team.
Over ten years ago, my three brothers and I came together on a journey where we shared our desire to achieve financial freedom for our families and future generations. We knew we couldn’t do it alone. We also knew that combining resources was nothing new. For the rich, outsourcing the administrative process to pool their money can cost tens of thousands of dollars. But that’s a drop in the bucket when you consider the size and scope of these investments for each group.
For my family, we had a hard time getting started in those early days. Like tackling the last piece of cake as kids, we were challenged to be on the same page, to navigate things like joint bank accounts, to be transparent, to manage a cap table and so many other obstacles, twists and turns.
I took it upon myself to do something about it and change the industry. Since founding Tribevest in 2018, we’ve solved countless problems to make it safe, easy, and transparent to form an investor group – or what many like to call – an investor tribe.
Let’s take a look at the top five ways to group invest.
1. Investor Tribes
Investor tribes are ideal for everyone from experienced investors to new investors looking to seize opportunities and improve their knowledge and wealth. If you want to team up with friends, family, or like-minded individuals to invest in anything from real estate to alternative investments, an investor tribe is a great option.
Suppose you are looking to team up with friends and family or a business partner to trade in multiple investment opportunities. In this case, a Investor Tribe may be the best investment group structure to consider.
Investor tribes have the advantage of simplicity. They are quick to launch and inexpensive. An investment tribe consists of a founder, or group leader, and members, who are equal participants and contributors to the group’s investment efforts.
The main consideration you want to make when pursuing an investor tribe is that you can only accept capital from active partners in your LLC. Your tribe cannot accept contributions from sponsors or passive investors. If you receive money from investors outside your LLC at any time, you may be subject to SEC regulations.
2. Real estate syndicates
Another format you can use to structure your investment group is syndication. Syndication involves investors coming together to buy real estate and is usually led by professional investors, also known as sponsors, who need funding for a specific project on a particular schedule.
A longstanding hurdle for real estate syndications is the minimum, which could be $50,000 or $100,000 per investment. Unless you have millions of dollars to invest each year, it can be difficult to diversify your portfolio across different asset types and markets.
Large minimums and a lack of diversification were additional issues that we solved at Tribevest. If you don’t have millions of dollars to sponsor, you can always use Investor Tribes or SPV to invest in syndication.
3. Special Purpose Vehicles (SPV)
Special purpose vehicles are suitable for professional investors. If you’re a professional who makes a living by finding, evaluating, and engaging in private transactions for clients and passive investors, an SPV may be a good choice.
SPVs are usually made up of general partners and limited partners. General partners are parties that participate in the management of the SPV. These partners are responsible for the debts of the SPV, which means that they are liable. On the other hand, limited partners are silent or passive investors in the transactions pursued by the SPV.
However, SPVs are not without drawbacks. First, you’ll want to consider the cost: setting up an SPV can be expensive. The standard setup fee for an SPV is up to 7% over six years.
Another factor to consider when looking for an SPV is that you will be subject to SEC rules and regulations. If you don’t have the knowledge, expertise, or time to navigate all of the appropriate SEC requirements in pursuit of your investment, an SPV might not be right for your investment group.
We recently launched Tribes Pro Vest, which allows an entity raising funds for a single transaction to easily create a multi-member LLC with active investors. This is a great tool for sophisticated investors looking to grow their investing business and need a streamlined process. Through the Tribevest Pro process, multiple investors can contribute capital to a specific transaction under the umbrella of an active multi-member LLC. Similar to an SPV, but with active members.
The tribe will be protected by a ratified operating agreement and will provide the ability to pool capital safely and quickly. Once all funds from all members of the LLC are pooled, the tribe can invest in a specific transaction as a single business entity. For example, if a tribe of 10 people contributes $25,000 each, their LLC can invest $250,000 in a syndication deal and possibly qualify for special terms to do so.
Because the number of members in a Pro Tribe is capped at 15 and members are active owners with a ratified operating agreement, voting rights, and quarterly meetings, a Pro Tribe is not required to register with the SEC.
Crowdfunding suitable for startup founders looking to fund their growing businesses with friends, family and employees. If that sounds like you, crowdfunding may be an option for your investment journey.
Technically speaking, crowdfunding is not the same as a group of investors. However, it is still a good choice for some specific cases.
One of the benefits of crowdfunding is that it can be an amazing way to raise capital without continuing traditional funding or in addition to conventional funding. If you’re crowdfunding for a startup or other business venture, it’s also a great way to build a solid base of brand advocates in the early stages of your business. You can also get media exposure if your crowdfunding campaign is a resounding success. This exposure can be through traditional media, such as a mention on a news station, trade publication, or social media if a popular user shares your crowdfunding on their feed.
Crowdfunding can be powerful, but its use cases are rather targeted. Similar to an SPV, a crowdfunded business is subject to SEC regulation. This can make things complicated or stressful to deal with.
Crowdfunding can also be expensive, where platforms require you to pay various fees. For example, if you’re using Kickstarter, you’ll pay 5% of your raised capital as a platform fee and then an additional 3-5% fee to process all contribution payments.
An investment fund can be a good choice if you are a professional investor looking for a long-term opportunity. A fund allows investors to pool capital to buy securities together. An investment fund is a complex investment group structure reserved for seasoned professionals. The advantage of a fund is that each member of the group controls their shares, keeping their autonomy while investing as a group.
Generally speaking, investment funds are formed by professional investors who seek to create a continuous investment activity allowing them to access more offers and benefit from the experience of the whole group.
Some of the benefits of funds include greater diversification, pursuing a wider variety of investments, and formal registration of your investment group with the SEC. You can also look for accredited passive investors to further increase the capital of your investment fund. A fund tends to be a long-term commitment, with an expected redemption of ten years or more.
Another disadvantage of investment funds is that they are often blind pools. This means that passive investors don’t always know what assets a portfolio includes when committing to funds.
Which investment group structure is best? It depends on your goals for your group, your investment and yourself. Each structure has its advantages. If you are considering an Investor Tribe or Tribevest Pro, please contact me or our team at Tribevest.
This article is presented by Tribevest
Tribevest has made doing business with partners easy, safe and transparent. Investors use Tribevest to form active business partnerships through Tribes and streamline their back-office operations.
Note by BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.