Generally speaking, an entrepreneur can accept investments from their friends, family, and business associates.
What constitutes a friend or business associates isn’t exactly cut and dry but it needs to be someone you know well and have interacted with for years…not someone you just let see your posts on Facebook.
For family, your distant 3rd cousin doesn’t count either…it has to be those that are close to you on the family tree…not twelve branches away. A close relative is a spouse, parent, grandparent, sibling, child, grandchild, or in-law.
A close friend is someone who has known a principal of the company for enough time to be able to judge that person’s capabilities and trustworthiness. The relationship must be direct. It’s not enough to belong to the same organization, association, to be a friend-of-a-friend, or be connected through some form of social media.
A close business associate is someone who has enough prior business dealings with a company principal to be able to judge that person’s capabilities and trustworthiness. You don’t qualify just because you are a customer, client, co-worker, or colleague.
In addition, a business can accept investments from wealthy individuals, known under securities rules as accredited investors. These are typically people with a high net worth and/or income. We’re talking the 1 percenters here.
There are other considerations too, including what one can and cannot say to prospective investors and requirements to notify securities regulators in certain circumstances. For these reasons and more, any business looking to raise money should retain a competent lawyer familiar with securities laws.
There are some specific RSP rules as well in terms of who can invest. Just because the shares themselves are determined to be a “qualified” investment, they cannot be a “prohibited” investment either.
This is defined in general terms to be a share of a company in which a particular RRSP, RRIF, or TFSA, either alone or together with non-arm’s length parties owns 10% or more of any class of the issued shares of the particular company or does not deal at arm’s-length with the company.
Non arms-length parties include related persons. Related persons include individuals connected by blood relationship, marriage, common-law partnership or adoption. Blood relationship. Is referred as being that of a parent or child (or other descendant such as a grandchild or great grandchild) or that of a brother and sister.
