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Do You Need a License To Start an Investment Company?

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Starting an investment company might be the perfect venture for you if you’re an entrepreneur with an appetite for risk. But, before you take the plunge, it’s important to understand the licensing and other requirements involved in running such a business. In this article, we’ll break down everything you need to know about getting started in the investment industry.

What Is an Investment Company and What Do They Do?

An investment company is a business that pools money from investors and then uses that money to buy securities; such as stocks, bonds, preferred shares and exchange-traded funds (ETFs). These businesses can come in many different shapes and sizes, but they all have one common goal: to make money for their investors.

There are two main types of investment companies:

Open-End Investment Companies (Mutual Funds) 

Open-end investment companies, also known as mutual funds, are the most common type of investment company. Mutual funds pool money from investors and then use that money to buy a variety of different securities, typically stocks, bonds, and cash equivalents. These funds are then managed by professional money managers who strive to grow the fund’s assets and generate income for investors.

Closed-End Investment Companies 

Closed-end investment companies are similar to mutual funds in that they also pool money from investors and use it to buy a variety of securities. However, closed-end investment companies do not issue new shares when money is invested; instead, they issue a fixed number of shares that trade on an exchange like a stock. Because of this, closed-end investment companies often trade at a premium or discount to their net asset value (NAV), which can create opportunities for savvy investors.

 

Licenses You Need to Start an Investment Company

If you’re thinking about starting an investment company, there are a few different licenses you’ll need to obtain:

Broker-Dealer Registration and Licensing (FINRA) 

If you want to start an investment company that will buy and sell securities, you’ll need to obtain a broker-dealer license. To do this, you’ll first need to pass the Series 7 exam, which is administered by the Financial Industry Regulatory Authority (FINRA). Once you’ve passed the exam, you’ll need to register your firm with FINRA and submit an application for a broker-dealer license.

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Investor Advisor License and Company NASAA Registration 

If you want to start an investment company that offers a high security level for your clients, you will want to consider joining the North American Securities Administrators Association (NASAA). This association is a watchdog collaborative of securities brokers and administrators to ensure that investors are being reliably guided and represented in their relationship with brokers. You can take a series of exams to establish your credibility as an investment advisor and you can register your company with NASAA, both of which will offer your customers a high degree of confidence in your integrity. 

Futures Commission Merchant (FCM) License 

If you want to start an investment company that will trade futures contracts, you’ll need to register your company as a Forex Dealer Member (FDM). To do so, you’ll apply through the Futures Commission Merchant (FCM) registration process. You will fill out several types of applications for both yourself as a “Security Manager,” and for your entity to fulfill the requirements. 

Commodity Pool Operator License (NFA)

If you want to start an investment company that will operate a commodity pool, you’ll need to obtain a CPO license. To do this, you’ll need to register with the National Futures Association and submit an application for a CPO license.

 

Commodity Trading Advisor License (NFA) 

If you want to start an investment company that will give advice to clients about commodity trading, you’ll need to obtain a CTA license. To do this, you’ll need to register with the National Futures Association and submit an application for a CTA license.

 

Requirements for Starting and Running Investment Company

In addition to obtaining the proper licenses, there are a few other requirements you’ll need to meet if you want to start and run an investment company. These requirements include:

Creating a Business Plan 

The first step in starting any business is to create a business plan. This document will outline your company’s goals, strategies, and financial projections. Your business plan should also include a marketing plan, which will detail how you plan to generate business.

Registering Your Business 

The next step in starting your investment company is to register your legal entity with the state in which you intend to operate. This process is typically handled by the Secretary of State’s office. In addition to registering your business, you’ll also need to obtain a business license and any other permits or licenses that may be required in your state.

Opening a Bank Account 

Once you’ve registered your business, the next step is to open a bank account for your company. This account will be used to deposit investments from clients and to pay expenses associated with running your business. When opening a bank account, be sure to shop around for the best rates and lowest fees.

Obtaining Insurance 

Another important step in starting your investment company is to obtain the proper insurance. This will protect your business from any potential liability claims. Some of the types of insurance you may need include errors and omissions insurance, general liability insurance, and professional liability insurance.

Creating an Investment Policy Statement 

An investment policy statement is a document that outlines your company’s investment objectives and strategies. This document should be created before you start accepting investments from clients.

Hiring Employees 

If you plan to hire employees, there are a few things you need to do. First, you’ll need to obtain workers’ compensation insurance. This will protect your business from liability in the event that an employee is injured while working. You’ll also need to comply with all federal and state employment laws, which include items such as minimum wage and overtime pay.

Maintaining Compliance 

Finally, you need to make sure you’re in compliance with all applicable laws and regulations. This includes items such as filing annual reports and paying taxes. Failure to comply with these requirements can result in heavy fines or even jail time.

 

Conclusion

Starting an investment company can be a great way to make money, but there are a few things you need to do first. Before you can start accepting investments from clients, you’ll need to obtain the proper licenses and registrations. You’ll also need to create a business plan, open a bank account, and obtain insurance. Finally, make sure you’re in compliance with all applicable laws and regulations.

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