Do Friends and Family Investors Have to Be Accredited? The 35-Investor Rule Explained
By Joel Arberman, founder of Prepared to Raise · 17 companies taken public, 30+ private placements prepared · Published November 8, 2026
First, the thing the phrase hides
There is no friends-and-family exemption in securities law. Money from your uncle is a securities sale like any other and needs an exemption; here is why. The exemption almost everyone uses is Rule 506(b) of Regulation D, and that is where the accredited-investor question comes from.
What accredited means
For an individual, the main tests are income over $200,000 in each of the last two years ($300,000 with a spouse or spousal equivalent) with a reasonable expectation of the same this year, or net worth over $1 million excluding the primary residence. Certain professional licenses also qualify. Entities qualify on asset tests or because all their owners are accredited. Many of the people in a typical founder's network are not accredited, which is why this question matters.
The 35-investor rule under 506(b)
Rule 506(b) allows unlimited accredited investors and up to 35 non-accredited investors in the offering. Three conditions attach to the non-accredited ones:
- Sophistication. Each must have enough knowledge and experience in financial and business matters to evaluate the investment, either alone or with a purchaser representative such as an accountant or financial advisor. You should document why you concluded they qualify.
- Disclosure. If even one non-accredited investor participates, you must give them specified information before the sale: in practice a private placement memorandum with a business description, risk factors, terms and financial statements. For raises up to $20 million the financial statement requirements are lighter than for larger offerings, but the document is still substantial. You must also make the same information available to the accredited investors.
- Access to questions. Non-accredited investors must have the chance to ask questions and get answers, and to obtain any additional information you can get without unreasonable effort.
Also, under 506(b) you cannot advertise or generally solicit. Every investor must be someone with whom you have a pre-existing, substantive relationship. For friends and family that is usually easy to show; for a friend of a friend it is not.
What 506(c) changes
If you want to advertise the raise, you will use Rule 506(c), and then every investor must be accredited and you must take reasonable steps to verify it. No non-accredited investors at all, however close the relationship. Your mother cannot invest in a 506(c) round unless she is accredited and verified like anyone else. 506(b) vs 506(c) covers how to choose.
Should you include non-accredited friends and family at all?
Legally you can. Whether you should is a separate decision.
- Cost. One non-accredited investor triggers the PPM requirement for the whole round. If your accredited investors would have been satisfied with a deck, executive summary and subscription documents, a $10,000 investment from a non-accredited friend can add $5,000 to $15,000 of legal and preparation cost. What a PPM costs.
- Suitability. The accredited-investor tests exist because this money can be lost entirely. A relative investing savings they need is a problem for them and, later, for you. Many founders set a rule: no investment that the person could not lose without changing their life.
- Cap table. Thirty small investors are thirty people to update, get signatures from and account for in every future financing. Consider a higher minimum and fewer investors. How to raise $500,000 to $1 million from people who know you covers structuring the round.
- Alternatives. A parent who wants to help but is not accredited may be better served by a loan or a gift than by equity. Should my parents give, lend or invest the money walks through it.
How to document accredited status in a 506(b) round
Under 506(b) investors may self-certify. The standard tool is an investor questionnaire attached to the subscription agreement, in which the investor checks the basis on which they qualify and represents that it is true. You do not need tax returns or bank statements under 506(b), though you cannot ignore facts that contradict the certification. Keep every questionnaire; they are what proves your exemption later. Under 506(c) self-certification is not enough; here is what verification requires.
Common mistakes
- Taking money from a non-accredited relative without any disclosure document because "it's family." The disclosure requirement does not have a family exception.
- Posting about the raise on social media, then trying to use 506(b). Can I post that I am raising money.
- Counting a non-accredited investor's spouse or trust as separate investors in ways that push you past 35, or assuming entities formed to invest are automatically accredited.
- Skipping the sophistication analysis and having no record of it.
- Forgetting that a non-accredited investor from another state may trigger additional state requirements. Blue-sky notice filings.
Related questions
How many non-accredited investors can I have in a friends-and-family round?
Up to 35 under Rule 506(b), each of whom must be sophisticated and receive the required disclosure. Under Rule 506(c), none.
Can my parents invest if they are not accredited?
Under 506(b), yes, if they are sophisticated or use an advisor and you give them the required disclosure document. Under 506(c), no. Consider whether a loan or gift serves them better than equity.
Do I need a PPM if all my friends and family are accredited?
Not as a legal requirement under 506(b). You still need the subscription agreement, investor questionnaire, governing-document changes and filings, and the anti-fraud rules still apply to everything you say, so clear written risk disclosure is wise.
What counts as a pre-existing relationship for 506(b)?
A relationship that existed before the offering and is substantive enough that you know the person's financial circumstances and sophistication. Family, long-time friends, business associates and existing customers typically qualify. Someone you met because they heard you were raising does not.
Where to start
Read what documents a compliant friends-and-family round needs, then what to offer family: SAFE, note, loan or LLC units. If you have already taken money without paperwork, here is how to fix it before you raise again.
This article is general information for founders, not legal, tax or investment advice. Securities rules depend on your facts; confirm your plan with a securities lawyer before you accept money.