For centuries, investing as a group has been a key ingredient in building wealth. I recognized early in my journey that earning a college degree, landing a steady W-2 job, and contributing to my 401(k) would only get me so far. I was participating in a vast investment world as an individual—but the real investors were “playing” on teams.
More than a decade ago, my three brothers and I came together on a trip where we shared our desire to obtain 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 wealthy, outsourcing the administrative process to pool their money may cost tens of thousands. But that is a drop in the bucket when considering the size and scope of these investments for each group.
For my family, we struggled to get started in those early days. Like grappling over the last piece of cake as kids, we were challenged to get on the same page, navigating things like joint bank accounts, being transparent, managing a cap table, and so many other hurdles, 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 issues 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 invest as a group.
1. Investor Tribes
Investor Tribes are an excellent fit for anyone, from experienced investors to newer investors, looking to break into opportunities and level up their knowledge and wealth. If you’re interested in teaming up with friends, family, or like-minded people to invest in anything from real estate to alternative investments, an Investor Tribe is a great option.
Suppose you’re looking to partner with friends and family or a business partner to transact in multiple investment opportunities. In that case, an Investor Tribe may be the best investing group structure to consider.
Investor Tribes have the benefit of simplicity. They are quick to launch and inexpensive. An Investor Tribe consists of a founder, or the leader of the group, and members, who are equal participants and contributors to the group’s investing efforts.
The primary consideration you want to account for when pursuing an Investor Tribe is that you can only accept capital from active partners in your LLC. Your tribe cannot accept contributions from limited partners or passive investors. If you take money from investors outside your LLC at any point, you may be subject to SEC regulations.
2. Real Estate Syndications
Another format you can use to structure your investment group is syndication. Syndication involves investors coming together to purchase a real estate asset and is typically led by professional investors, also known as sponsors, who need to finance a specific project according to a particular timeline.
A long-time hurdle for real estate syndications is the minimums, 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 into different asset types and markets.
Large minimums and a lack of diversification were additional issues we solved at Tribevest. If you don’t have millions of dollars to become a sponsor, you can always use Investor Tribes or SPVs to invest into a syndication.
3. Special Purpose Vehicles (SPVs)
Special purpose vehicles are a fit for professional investors. If you are a professional making a living through finding, assessing, and participating in private deals for clients and passive investors, an SPV may be a good fit.
SPVs generally consist of general partners and limited partners. General partners are parties who take a role in helping to manage the SPV. These partners are liable for the SPV’s debts—meaning they’re on the hook. On the other hand, limited partners are silent or passive investors in the deals pursued by the SPV.
SPVs aren’t without their downsides, however. First, you’ll want to consider the cost: setting up an SPV can be expensive. A standard setup fee for an SPV is up to 7% over six years.
Another factor to consider when looking into an SPV is that you will be subject to the rules and regulations of the SEC. If you don’t have the knowledge, expertise, or time to navigate all the appropriate SEC requirements in pursuing your investment, an SPV might not be the right fit for your investment group.
We recently launched Tribesvest Pro, which allows an entity raising funds for a single deal to easily create a multi-member LLC with active investors. This is a great tool for savvy investors who are looking to expand their investment business and need a streamlined process. Through the Tribevest Pro process, multiple investors can contribute capital towards a specific deal 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 offer the ability to pool capital safely and quickly. Once all the funds are pooled from all the members of the LLC, the tribe can invest in a specific deal as one business entity. For example, if a Tribe of 10 people contribute $25k each, their LLC can invest $250,000 into a syndication deal and perhaps hit special terms for doing so.
Since the number of members in a Pro Tribe is capped up to 15, and the 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 suits startup founders looking to fund their growing businesses with friends, family, and employees. If this sounds like you, crowdfunding may be an option for your investing journey.
Technically speaking, crowdfunding isn’t the same thing as an investor group. However, it’s still a good fit for some specific cases.
A benefit of crowdfunding is it can be an incredible way to raise capital without pursuing traditional financing or in addition to conventional financing. 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 may also get media exposure if your crowdfunding campaign is a smash hit. This exposure may be through traditional media like a mention on a news station, trade publication, or social media if a popular user shares your crowdfund on their feed.
Crowdfunding can be powerful, but its use cases are rather targeted. Similar to an SPV, a crowdfunded venture is subject to SEC regulation. This can make things complicated or stressful to manage.
Crowdfunding can also be expensive, where platforms require you to pay various fees. For example, if you’re using Kickstarter, you will pay 5% of your raised capital as a platform fee, then an additional 3-5% fee to process all contribution payments.
An investment fund might be a good choice if you’re a professional investor looking for a long-term opportunity. A fund allows investors to pool capital to purchase securities together. An investment fund is a complex investment group structure best reserved for seasoned professionals. The advantage of a fund is that each group member controls their shares, maintaining autonomy while investing as a group.
Generally speaking, investment funds are formed by professional investors looking to create an ongoing investment business that lets them access more deals and leverage the entire group’s experience.
Some of the benefits of funds include diversifying to a greater extent, pursuing a wider variety of investments, and formally registering your investment group with the SEC. You can also seek accredited passive investors to further boost your investment fund’s capital. A fund tends to be a long-term commitment, with an expected buy-in of ten years or more.
Another downside of investment funds is that they are often blind pools. This means passive investors don’t always know what assets a portfolio includes when they sign on to contribute funds.
Which investing group structure is the best one? That depends on your goals for your group, your investment, and yourself. Each structure has its benefits. If you are considering an Investor Tribe or Tribevest Pro, please reach out to 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.