Monday, November 18, 2013

Don't Rush to Make Changes in Club Membership Structures

[NOTE: This article first appeared in the December 2010 Edition of Hyatt & Stubblefield, P.C.'s "The Client Letter"]
A great many clubs are having a difficult time selling memberships in these economic times.  In many cases, they have a lot of unsold inventory.  At the same time, the club might be experiencing an expanding resale wait list.  As a result, clubs are trying to think of creative ways to invigorate their sales programs to generate new interest or to tap into a new market.
If your club is considering making a change in the membership structure or offering new types of memberships or new membership arrangements, we encourage you to obtain legal advice before making any changes to ensure that the new structure or offering is permitted by the club documents and is structured to avoid inadvertently creating securities problems.
Depending upon how they are structured and marketed, the offering of club memberships can be considered a securities offering under state and/or federal laws, requiring registration of the offering with state or federal authorities unless an exemption is available.  Failure to comply can result in significant liability for the club and those involved in the sale of unregistered securities.  
Most clubs will want to avoid the extra hurdles and costs that characterization as securities will cause.
In order for a club to create new types of memberships or to offer memberships with different terms or conditions than existing memberships, the club documents must authorize such action.  If the club does not currently have such authority, the club documents may need to be amended.  If a new type of membership is being created, the club documents also need to address all of the terms and conditions of such type membership, such as provisions for use rights, guest privileges, resignation, and payments to resigning members who hold that class of membership.
The bottom line is that, while the club may be very anxious to generate membership sales and additional dues income, you should not rush into new arrangements or marketing strategies until club management has carefully thought through all of the implications of such new plans.  We can help you evaluate any proposed membership arrangements or marketing strategies to address potential problems.

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