There are FIVE exemptions that can be used to raise money into an LP.
Therefore, if you do an LP with a larger # of investors you are issuing
securities, which are regulated by the provincial security commissions.
You can issue securities under prospectus-exempt legislation under a
number of conditions, such as not controlling people's assets or not
giving advice, and adhering to one of the following five exemptions.
Of the five exemptions one is not available in Ontario, but in the western provinces.
The exemptions are:
a) close friends & family of the syndicator
b) close business associates
c) accredited investors (as defined in $200,000 in annual income or net
investable assets over $1M, which excludes your personal home, for
example)
d) aggregate acquisition cost, over $150,000
e) offering memorandum (OM) to eligible investors (those with incomes over $70,000 or investable assets over $400,000)
The last exemption is available in BC, AB, SK, MB, NWT .. but NOT in Ontario !!!
Since there is such a large jump in income or assets between e) and c)
it is indeed not so common in Ontario to use an LP or an OM .. although
it is still done using the other 4 groups ! Option e) i.e. the OM option for eligible investor may be available in the fall of 2014.
An LP agreement costs perhaps $8-$12,000 .. and an OM another $25,000 to
$40,000 depending on complexity, lawyer and degree of cloning of
similar OMs.
Specifically to your question, presumably a friend (i.e. a person you do not know) of a close friend of yours is NOT your close friend, nor is the mother of close friend.
Note the word "close" but also note that NI 45-106 does not define friend. There is some interpretation to my knowledge what a "close business associate" is, ie. not someone you met once at a REIN meeting. Of course, if you now meet this person numerous times that could change.
At the very least get a risk acknowledgement form signed and another document stating that they are a close friend, a relative (as listed below) or close business associate.
Here is what NI 45-106 says about issuing securities as a private issuer (with less than 50 investors):
The prospectus requirement does not apply to a distribution of a security of a private issuer to
a person who purchases the security as principal and is
[*]
(a) a director, officer, employee, founder or control person of the issuer,
[*]
(b) a director, officer or employee of an affiliate of the issuer,
(c) a spouse, parent, grandparent, brother, sister, child or grandchild of a director,
executive officer, founder or control person of the issuer,
(d) a parent, grandparent, brother, sister, child or grandchild of the spouse of a>director, executive officer, founder or control person of the issuer,
[*]
(e) a close personal friend of a director, executive officer, founder or control person
of the issuer,
[*]
(f) a close business associate of a director, executive officer, founder or control
person of the issuer,
[*]
(g) a spouse, parent, grandparent, brother, sister, child or grandchild of the selling
security holder or of the selling security holder`s spouse,
[*]
(h) a security holder of the issuer,
(i) an accredited investor,
(j) a person of which a majority of the voting securities are beneficially owned by, or
a majority of the directors are, persons described in paragraphs (a) to (i),
(k) a trust or estate of which all of the beneficiaries or a majority of the trustees or
executors are persons described in paragraphs (a) to (i), or
(l) a person that is not the public.
This is NOT legal advice, just an (informed?) opinion. Please consult with an expensive securities lawyer for insight here and appropriate forms. Be prepared to pay $300-$500/h for securities lawyers' advice. On occasion I have had different opinions by different lawyers. The OSC especially has a long arm. You are guilty until proven innocent in many cases. Proceed with caution.