Is There a Friends-and-Family Exemption From Securities Law?
By Joel Arberman, founder of Prepared to Raise · 17 companies taken public, 30+ private placements prepared · Reviewed October 21, 2026
Why the phrase misleads founders
"Friends and family round" describes who is investing, not a legal category. The Securities Act does not care whether you know the investor, love them or eat Thanksgiving dinner with them. If they hand you money expecting a return from your efforts, they are buying a security, and the same rules apply as if they were a stranger. That includes stock, LLC units, SAFEs, convertible notes, revenue-share agreements and, in many cases, promissory notes given to investors.
The reassuring part: the exemption that fits most of these rounds is well established and not expensive to comply with. The risky part is assuming none of it applies.
The exemptions a friends-and-family round can use
- Rule 506(b) of Regulation D. The one most rounds use. No limit on the amount raised. Unlimited accredited investors and up to 35 non-accredited investors, as long as each non-accredited investor is financially sophisticated, alone or with an adviser. No public advertising: you can only approach people with whom you have a pre-existing, substantive relationship. You file a Form D with the SEC within 15 days of the first sale, at no SEC cost, and a notice filing in most states where investors live, usually with a fee. State registration is pre-empted.
- Section 4(a)(2). The underlying private-offering exemption that 506(b) gives you a safe harbor under. Relying on it alone is less certain and does not pre-empt state law, so most advisers use 506(b) instead.
- Rule 504. Up to $10 million in 12 months, but because it does not pre-empt state law you must register or find an exemption in every state where an investor lives. Rarely simpler in practice.
- Intrastate offerings (Rule 147 and 147A). If the company and every investor are in one state, that state's rules govern. Useful in narrow cases.
- Regulation Crowdfunding. Lets anyone invest, through a registered funding portal, with a Form C and reviewed or audited financial statements. It is built for raising from a community, not for a handful of relatives.
What Rule 506(b) actually asks of you
- No general solicitation. Do not post that you are raising on LinkedIn, Facebook or Instagram, email a list of strangers, or pitch at an open event. Talk one to one with people you already know.
- Know who is accredited. Have each investor complete a questionnaire. Under 506(b) an investor can certify their own status; you do not have to collect tax returns.
- If anyone is not accredited, give real disclosure. Non-accredited investors must receive written information comparable to a registered offering, including financial statements, before they buy, and a chance to ask questions. In practice that means a private placement memorandum. This is why most advisers recommend keeping a small round to accredited investors only.
- Use proper documents. A subscription agreement, the instrument itself (stock purchase, SAFE or note), the investor questionnaire, risk factors, and an updated cap table or operating agreement.
- File. Form D within 15 days of the first investor committing, and the state notices. A SAFE or note round needs the same filings as a stock round.
- Check for bad actors. If any officer, director or 20% owner has certain securities-related convictions or orders, 506 may be unavailable.
What happens if you skip it
Nothing, until something goes wrong. Then it matters a great deal. An unregistered, non-exempt sale gives investors the right of rescission: they can demand their money back with interest, regardless of how the business performed. State regulators can bring actions. Every future investor and every acquirer will ask about prior rounds in diligence, and a messy friends-and-family round is a common reason a later deal gets repriced or delayed. The anti-fraud rules apply to every sale, exempt or not, so anything you told your relatives about the business has to have been accurate and complete.
If you have already taken money on a handshake, it can usually be cleaned up: paper the investment, file a late Form D, and in some cases make a rescission offer. Do it before your next raise, not during it.
The half that is not legal
Getting the exemption right keeps you out of trouble. It does not get anyone to invest. People who know you are often the hardest investors to ask, because the relationship is on the line and they will not tell you the real reason they said no. Most friends-and-family raises that stall do so because the amount is larger than the network can provide, the valuation is set too high, or the founder's materials are not organized enough to give the people closest to them confidence. Those are fixable before the first conversation.
Related questions
Can I take money from non-accredited friends?
Yes, under 506(b), up to 35 of them, if each is financially sophisticated and receives full written disclosure. Many founders find it simpler to raise only from accredited relatives and friends, or to structure smaller checks from others separately with counsel.
Does a loan from my parents count as a security?
Often, if they are lending to the business as an investment rather than making a personal family loan to you. Have a lawyer look at how it is structured.
Do I need a lawyer for a $50,000 round?
You need the documents and filings done correctly. A securities lawyer, or a preparation firm whose documents are reviewed by securities counsel, can do this for a fraction of what fixing it later costs.
What is a pre-existing relationship?
One where you know the person well enough to judge their financial situation and sophistication before you mention the investment. Family, close friends, long-standing clients and colleagues usually qualify; someone you met at a conference last week usually does not.
Where to start
Read how to raise $500,000 to $1 million from people who know you. Our Network Raise package prepares that raise: strategy, materials and lawyer-reviewed documents including Form D, for a fixed $15,000. A Readiness Assessment ($1,500, credited in full within 60 days) tells you first whether you are ready.
Prepared to Raise is a service of Meraki Partners, LLC. This article is general information, not legal, tax or investment advice, and not an offer to sell or a solicitation to buy any security. Meraki Partners is not a broker-dealer, funding portal, investment adviser or law firm. Figures are as of the review date above.