The legal procedures have been discussed repeatedly on other threads. The main points as per my memory:
1. California is going registration even if neither you nor your friend have anything to do with California.
2. The CFTC registration can be postponed if you solicit fewer than 12 investors and keep to Qualified Investors ($$).
3. You will want to use your trading history in the future as your performance numbers so seriously consider using an account such as an IB incubator account.
4. Would it make more sense to sell your services as software/newsletters/educational products, and not get personally involved with their discretionary overrides.
Don't depend upon my memory, however.
The primary issues, really, are distribution of profits and distribution of losses.
Example 1. Ron trades his aunts stock portfolio in addition to his own. Since he is helping to pay for her nursing home. Taking a share of the profits would only generate more tax liabilities. She doesn't really know if he is losing her money, and doesn't really care since she depends upon him period.
Example 2. Don worked as a registered broker-dealer his whole life. He sold his accounts to the firm upon retirement. A couple of particularly personal accounts have come back to him. He doesn't take a stake in the profits/losses, but for John, it is making $5000/month trading profits. Don has changed software platforms, and this will change some of the trading for John. John is not happy with change. Don is not happy about being told how to do pro-bono work. Don offers that if John will pay the $50/month software fee for the old platform, he will reluctantly continue. John is not happy with change. Don is not happy. Friendship kaput.
Example 3. Todd gets his millionaire friend Robert to stake him $25k. The understanding is that Todd is not responsible for losses. Soon the account is up $100k, and Todd wants to discuss their split of the profits. No lawyers, just friends. Todd takes out some money to payoff a credit card. The account then has a drawdown. The investor freaks, and calls the police. Fraud is pretty broadly defined. What does Todd's lawyer have to work with? Some verbal agreements?
I think that the respondents have provided the more important point. How much do you need the leverage? How will handling OPM affect your trading? If you are willing to risk the relationship, how do you formalize this in a business agreement?
After those decisions, search ET then search the SEC/CFTC to find out the actual regs. Even if there is no actual registration requirements, formalization helps. Everybody is easy and reasonable when they think there is easy money to be had.
