I was recently corresponding with a client who was throwing around the words “investment company,” and what they were actually forming was a company that was buying an asset. Saying “investment company” is something you want to be very careful about because it has a very specific meaning in the securities regulations under state and federal law. There’s, in fact, an entire act, the 1940 Act, which was enacted about investment companies. Of course, it’s been modified and updated since then, but there’s a whole set of laws about an investment company.
Essentially, an investment company is where you’re taking and collecting money and using that to make financial investments, usually in securities, of another company. Just because investors are investing in a company and the company is buying assets doesn’t necessarily make it an investment company. You have to look at the very specific structure, but you should be aware that those regulations are out there and they can trip people up. I have had clients that have created entities, and they didn’t realize they were creating an investment company, which is a whole other ball of wax. You want to be careful. Don’t use the term “investment company” loosely. It does have a very specific meaning, and you want to make sure that you understand how you’re using the terminology. As always, consult with a lawyer you trust about how to use an investment company properly, whether your company is an investment company, and what regulations you may have to comply with.
What’s been your experience? Have you had terms that have surprised you along the way? What have you done to avoid these situations? Join us in the comments below and let us know about your thoughts and experience.
Each case is unique. Past results do not guarantee future outcomes. This posting is intended to be a tool to familiarize readers with some of the issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. Each case is unique. Past results do not guarantee future outcomes. This article should not be treated as legal advice to any person or entity. Free Images Photographer Darren Shaw.
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