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The Cutting Edge: Focus on Personal Technology

Investment Club Service Raises Questions

Internet: Web-based matchmaker carries risks for those who want to form or join a group. One organization says the site may violate securities laws.


Seemingly everyone wants to know how to invest in stocks in rollicking times like these. After all, if you had invested in a broad basket of U.S. stocks five years ago, you would have more than doubled your money. That's helped make investment clubs--where friends or colleagues meet to pool their financial and intellectual resources to invest as a group--popular among a wide swath of novice investors.

But if you didn't have a group of friends who wanted to invest with you, you were usually out of luck--at least until recently. Finding and joining a club or forming a club with folks outside your normal group of friends was difficult. That's largely because the National Assn. of Investors Corp., or NAIC, the main group that helps investment clubs get started, believes that soliciting members for a new or existing club may be illegal, and it won't facilitate the soliciting process.

Ion Yadigaroglu, co-founder of a new Web site, thinks otherwise. He's started an Internet-based service called Bivio ( that serves as something of a matchmaker for investors who want to form or join an investment club. The site also helps existing clubs handle their accounting and club communications. If a club imports data compiled on NAIC accounting software onto the Bivio site, for example, the system will automatically update the value of the club's--and individual members'--holdings based on the previous day's closing stock prices. In addition, clubs can create private bulletin boards on the site, so members can communicate online.

Of course, plenty of computer-based services can help with accounting. The unusual aspect of Bivio is that it provides a chance to meet potential investors online to form a club from scratch or sign up with one that's already operating.

That has sparked controversy. The NAIC, a Michigan-based organization that creates tools to help investment clubs form and operate, believes the site's investor matchmaking service may be violating securities laws. Others disagree but say Bivio can inadvertently create situations that might be hazardous to an investor's financial health. Because of the anonymity of the Internet, it has become fertile ground for con artists.

"They are saying they are going to try to put together investors and investment clubs. But if you check with the SEC, you will find that is something that you probably cannot do," said Ken Janke, president and chief executive of the NAIC. "Most of the other things that they are offering, we already provide."

According to Janke, putting prospective club members together is tantamount to offering an unregistered security for sale--a violation of Securities and Exchange Commission rules. But SEC rules about what constitutes a security for sale are dense and subject to interpretation. Many experts believe the NAIC's take is too strict.

"An investment club in formation is not a security," said Marianne Smythe, partner at the Washington law firm of Wilmer, Cutler & Pickering and the former director of enforcement for the SEC. "As long as everyone is participating in making the [investment] decisions, it's just a club."

The SEC has said much the same in response to queries by investment club directors, who wanted to hold regional investment fairs and post the names and phone numbers of clubs willing to take new members.

Still, what is probably legal may not be wise.

Visitors who go to the Bivio site can click through a short introduction about investing through clubs before registering to join. All you need for signing up is an e-mail address. You don't need to provide your full name--real or otherwise--or reveal any information about your investing credentials or even your rap sheet, if you have one. With a few more keystrokes, you can begin to form your own club by immediately inviting other investors to join you.

Because club administrators and treasurers generally have the authority to add members and handle all the club's financial transactions--from buying and selling securities to banking--the ease of formation and membership solicitation presents risks to potential investors. There's little to stop anyone from absconding with club money. Investing neophytes, who have neither the time nor the expertise to investigate the backgrounds of their club brethren, should beware.

"As with any other dating service, you ought to get a lot of information about the people you're planning to throw in with before you invest," Smythe said.

Even Yadigaroglu suggests proceeding with caution. "We create for each club its own space. They can have their own logos, descriptions, links to research, computations and accounting. But what we tell people is that meeting online is just a first step. We are putting people in touch. They should build knowledge of each other before they build a real partnership. An investment club is not something that you should start with somebody you have never spoken to" in person.


Times staff writer Kathy M. Kristof welcomes your comments and suggestions for columns but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053, or e-mail

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