Friends and Family Rounds: How to Raise From People You Know Without Breaking the Law

A friends and family round is still a sale of securities, which means securities law applies to it exactly the way it applies to a raise from strangers. The relationship does not create an exemption. To raise from people you know legally, you sell under a real exemption (most often Regulation D Rule 506(b)), give every investor honest written disclosure, file a Form D and any required state notices, and keep general solicitation out of it. Done right, the same documents that keep you compliant also protect the relationships you care about most.

This is one of the few moments in a capital raise where the legal stakes and the personal stakes point in the same direction. For the founder, syndicator, or fund manager, getting the structure right is what prevents a soured deal from becoming a lawsuit. For the friend or family member writing the check, the documents are what turn a favor into an informed decision. Both sides are served by the same thing: doing the early raise the way you would do a professional one.

Is a friends and family round a legal category? No.

“Friends and family round” is a phrase from the startup and syndication world, not a section of the securities laws. There is no rule that says money from people you know is exempt, lightly regulated, or off the regulators’ radar. When you give someone equity, a promissory note, or an interest in your fund in exchange for their money, you are selling a security, and that triggers the same federal and state rules that govern any private offering.

The reason this matters is that the informality of an early raise is exactly what creates the exposure. A handshake, a text thread, and a wire feel like a personal arrangement. Legally, they are an unregistered securities transaction, and if it is not structured under a valid exemption, it can be a violation regardless of how friendly the terms were. The structure of the raise, not the warmth of the relationship, is what keeps you compliant. That principle is the heart of why the structure of your capital raise matters more than the pitch.

The exemption that usually fits: Rule 506(b)

Most friends and family rounds are run under Rule 506(b) of Regulation D, and for good reason. It is built for raising privately from people you already have a relationship with.

• No dollar cap. Rule 506(b) places no limit on how much you can raise, so it works whether the round is $250,000 or several million.
• Unlimited accredited investors. You can accept any number of accredited investors, and under 506(b) they are generally permitted to self-certify their status.
• Up to 35 non-accredited investors. You may include up to 35 non-accredited investors in the offering, as long as each is sophisticated, meaning they have enough financial and business knowledge to evaluate the investment, and as long as you provide them specified disclosure.
• No general solicitation. The trade-off is that 506(b) does not let you advertise the raise. The relationship has to come first, and the investment conversation second.

The alternative, Rule 506(c), lets you advertise publicly but requires you to take reasonable steps to verify that every investor is accredited, which usually rules out non-accredited friends and family. The choice between them is not a detail. It controls who you can accept and how you can talk about the deal. We lay out the full comparison in the 506(b) vs. 506(c) guide.

The accredited investor problem with people you know

Here is the friction unique to friends and family rounds: the people closest to you are often not accredited investors. An accredited individual generally needs annual income above $200,000 (or $300,000 jointly with a spouse) in each of the two most recent years, or a net worth over $1 million excluding the value of a primary residence. As of 2026 those thresholds are unchanged from when they were set, so a large share of supportive friends and relatives will fall below them.

That does not mean you have to turn them away. It means you have to follow the path that allows non-accredited investors. Under 506(b), each non-accredited investor must be sophisticated and must receive disclosure that, in practice, looks like a real private placement memorandum. Some smaller raises instead use Rule 504, which permits up to $10 million in a 12-month period but is more dependent on individual state rules. The practical point is the same: the moment you accept money from someone who is not accredited, the quality of your disclosure stops being optional and becomes the thing that protects you.

General solicitation: the mistake that quietly breaks the exemption

The most common way a friends and family round goes off the rails is general solicitation. Because 506(b) prohibits advertising, broadcasting your raise can break the exemption you are relying on, even if every dollar comes from someone you know.

What counts as a problem is broader than people expect. A public post on LinkedIn or Instagram announcing that you are raising, a mass email to a list of contacts you have no real relationship with, a pitch to a large group chat of acquaintances, or a comment in a public forum can all look like general solicitation. The safe posture for a 506(b) round is to keep the offering tied to genuine, pre-existing relationships and to have those conversations privately. If you want to be able to post publicly about the raise, that is a 506(c) conversation to have with counsel before you say a word in public, not after.

Disclosure protects the relationship, not just you

It is tempting to think that disclosure documents are for deals with strangers, and that people who trust you do not need the formality. The opposite is true. The relationship is the reason to be more careful, not less.

A complete disclosure document, with honest risk factors, does two things at once. It satisfies the securities-law requirement to tell investors what they are getting into, and it makes sure your friend or relative actually understood the risk before they invested. If the deal underperforms, that written record is the difference between a disappointed investor and a viable legal claim. A losing investment is not automatically a lawsuit. A losing investment where the investor can say they were never told the risks is a different situation entirely. We cover that dynamic in detail in how a PPM protects you from investor lawsuits.

One rule applies no matter which exemption you use or how close the investor is: you cannot make a material misstatement or leave out a material fact. The anti-fraud rules do not have a friends and family carve-out. Telling your brother-in-law only the good parts is not a shortcut. It is the exact thing the disclosure document exists to prevent.

The filings people forget: Form D and blue sky

Two compliance steps get skipped in informal rounds because no one is watching the calendar.

• Form D. A Regulation D offering requires a Form D notice filed with the SEC, generally within 15 days of the first sale of securities. It is a notice filing, not a request for permission, but missing it still puts you out of step with the exemption you claimed.
• State blue sky notices. Each state where an investor lives has its own notice requirements for a Reg D offering. Federal compliance does not cover this. A round with investors in four states can carry filing obligations in all four, and missing them is a quiet way to fall out of compliance.

Neither filing is complicated when it is handled as part of the raise. Both are easy to forget when the raise is being run on trust and a spreadsheet. This is part of why experienced raisers treat even the smallest first round as a real offering. There is no version of a capital raise where the securities rules simply do not apply, a point we make plainly in you cannot raise capital without securities compliance.

The mindset that keeps the round clean

The hardest part of a friends and family round is usually not the law. It is the instinct to keep things casual because the people involved are close to you.

Treat the early round like the professional round it is. The structure you build for friends and family is the same structure that lets you go to larger investors later without rebuilding from scratch. Cutting corners now does not save money. It creates a foundation you will have to tear out and redo, often at the worst possible moment, when a serious investor’s lawyer starts asking questions.

Protect the people, not just the deal. The reason to paper a friends and family round properly is that these are the relationships you most want to keep. The documents are not a sign of distrust. They are how you make sure that if the deal does not go as planned, the friendship survives the outcome.

Asking people who believe in you to back you is one of the hardest and most admirable things a founder does. The way you honor that trust is by giving them a real decision to make, in writing, with the risks on the table.

You do not have to figure out the exemption yourself. Whether your round fits 506(b), 506(c), or something else depends on who your investors are, where they live, and how you plan to find them. That is a short conversation for a securities attorney and a long, error-prone guessing game for an operator. The point of bringing in counsel early is to take that question off your plate so you can focus on the deal itself.

Frequently asked questions

Is a friends and family round actually covered by securities law?

Yes. A friends and family round is not a legal exemption or a separate category of fundraising. It is a private securities offering, and the same federal and state securities laws apply whether your investors are strangers or your closest relatives. The personal relationship does not remove the requirement to sell under a valid exemption, disclose honestly, and make the required regulatory filings.

Do I need a PPM to raise from friends and family?

In most cases, yes. Whenever you sell equity, debt, or fund interests, you are selling a security, and a private placement memorandum is how you meet your disclosure obligations and create a written record of what investors were told. A short conversation with a securities attorney can identify the limited situations where a lighter document set is appropriate, but raising on a handshake alone leaves you exposed.

Can I take money from friends and family who are not accredited investors?

Often yes, but it changes the rules you follow. Rule 506(b) of Regulation D allows up to 35 non-accredited investors in an offering, provided they are sophisticated and you give them specified disclosure. The accredited thresholds (roughly $200,000 in annual income, $300,000 jointly, or $1 million in net worth excluding a primary residence) are not met by many friends and family investors, so the disclosure you provide matters even more.

Can I post about my raise on social media or mention it in a group chat?

Be very careful. Rule 506(b), the exemption most friends and family rounds rely on, does not permit general solicitation. Broadcasting the opportunity on social media, in a public newsletter, or to a large group of people you do not have a real relationship with can break the exemption you are counting on. Keep the conversation private and tied to genuine pre-existing relationships, or talk to counsel about Rule 506(c) first.

What happens if a friends and family deal goes wrong?

A losing deal is not automatically a legal problem, but a poorly documented one can become both a lawsuit and a ruined relationship. Honest written disclosure, with real risk factors, is what separates a disappointed investor from a viable securities claim. The documents protect the people you care about by making sure they understood the risk before they wrote the check.

How much can I raise in a friends and family round?

It depends on the exemption. Rule 506(b) places no dollar cap on how much you raise, which is one reason it is the common choice. Rule 504 caps the raise at $10 million in a 12-month period and is more state-dependent. The right exemption depends on your investors, your plans to advertise, and where they live, which is a fast question for a securities attorney to answer.

This article provides general educational information about raising capital from friends and family and securities law. It does not constitute legal advice, and reading it does not create an attorney-client relationship. Attorney advertising. Prior results do not guarantee similar outcomes. For guidance on your specific raise, speak with a PPM LAWYERS attorney.