Learn how to legally raise money from friends and family without risking securities law violations.
Raising money from friends and family seems like the most natural first step for many real estate syndicators, startup founders, and investment fund managers. After all, who else would believe in your vision as much as they do? But what many new entrepreneurs don’t realize is that asking loved ones for capital isn’t as simple as a handshake deal. It’s actually considered a securities offering—meaning it’s subject to federal and state securities laws. Mess it up, and you could end up in serious legal trouble.
In this post, we’ll walk you through what the law really says about raising money from friends and family, how to do it legally, and how tools like a Private Placement Memorandum (PPM) under Rule 506(b) can help protect both you and your investors.
Why Friends And Family Rounds Are Still Subject To Securities Laws
Many entrepreneurs mistakenly believe that because they’re only raising money from people they know, securities laws don’t apply. Unfortunately, that’s not the case.
The Securities Act of 1933 requires that any offer or sale of securities be registered with the SEC—unless a valid exemption applies. Whether you’re asking a stranger or your best friend for investment money, if you’re offering an ownership stake, profit share, or other securities interest, you must either:
- Register the offering, or
- Qualify for an exemption.
Friends and family rounds often rely on such an exemption from registration known as Regulation D, Rule 506(b). This allows you to raise money legally without the burdensome SEC registration process—but only if you follow the rules carefully.
What Is Rule 506(b) And Why Does It Matter?
Rule 506(b) under Regulation D provides a way for issuers to raise an unlimited amount of money from investors without registering with the SEC, provided they:
- Do not generally solicit or advertise the offering (i.e., no public promotions);
- Limit the offering to “accredited investors” and up to 35 non-accredited investors who are “sophisticated”;
- Provide disclosure documents (like a PPM) especially if any non-accredited investors are involved.
In the context of friends and family fundraising, Rule 506(b) is usually the go-to exemption because:
- You already have a “pre-existing substantive relationship” with the investors
- The offering remains private (no public marketing)
- You can include some non-accredited investors if necessary
However, simply being friends or family doesn’t automatically guarantee compliance. You still need to carefully document the relationship and ensure full transparency.
How To Legally Raise Money From Friends And Family
Here are the critical steps to raise money from friends and family the right way:
1. Establish a Substantive Pre-Existing Relationship
Regulators want to see that you knew your investors personally before you started the fundraising process. This isn’t just a LinkedIn connection; it involves a relationship where you understand their financial circumstances and investment experience.
Keeping records of communications, meetings, or other interactions before the offering can help prove this relationship existed.
2. Avoid General Solicitation
You cannot publicly advertise your offering on social media, websites, or email blasts—even if you’re only targeting friends and family. Keep your communications private, direct, and one-on-one.
Even a “small” public post like “Hey, I’m raising money for my new startup!” could violate securities laws if it’s considered general solicitation.
3. Provide a Proper Private Placement Memorandum (PPM)
Even if your investors are friends and family, a PPM is crucial. This legal document outlines:
- The terms of the investment
- Risks involved
- Company background
- Management bios
- Financial information
Issuing a PPM not only helps protect you from future disputes but also satisfies Rule 506(b) disclosure requirements, especially if any non-accredited investors are participating.
4. Confirm Investor Status Appropriately
Under Rule 506(b), if you are accepting both accredited and non-accredited investors, you are permitted to rely on an investor’s self-certification of their accredited status without independently verifying their financial information. Friends and family may indeed qualify as accredited investors based on income, net worth, or professional status. To document compliance, you should have each investor complete an investor questionnaire or similar form confirming their status. Maintain these records carefully to demonstrate you met the exemption’s requirements.
If you include any non-accredited investors, ensure they are “sophisticated” enough to understand the investment’s risks, and provide even more robust disclosures.
5. File Form D with the SEC
After the first sale of securities, you must file Form D electronically with the SEC. This is a simple notice filing but it’s an essential step to maintain your exemption under Rule 506(b).
Many states also require “Blue Sky” filings, so consult legal counsel to handle the state-level compliance properly.
Common Mistakes To Avoid When Raising From Friends And Family
- Assuming securities laws don’t apply: They do—always.
- Skipping the PPM: Protect yourself and your investors.
- Advertising publicly: Even “friendly” posts can be a violation.
- Not documenting relationships: Keep evidence of your relationships and investor communications.
- Failing to make required filings: Missing Form D or state filings can jeopardize your exemption.
Why A PPM Is Critical For Friends And Family Rounds
Some entrepreneurs feel awkward about giving legal documents to friends and family. It might feel “too formal” or even “untrusting.” But a PPM is not about distrust—it’s about:
- Setting clear expectations
- Disclosing risks transparently
- Complying with securities laws
- Protecting relationships for the long term
The last thing you want is a miscommunication leading to a legal dispute with people you care about most.
Issuing a PPM shows professionalism, builds credibility, and ultimately strengthens the trust your friends and family have in you.
Final Thoughts: Raising Capital From Friends And Family The Right Way
Friends and family can be your biggest supporters in launching your real estate syndication, investment fund, or startup. But don’t let good intentions turn into costly mistakes.
By following Rule 506(b) requirements, avoiding general solicitation, using a properly drafted PPM, and filing the necessary legal forms, you can raise capital legally—and keep your personal relationships intact.
Ready to protect your friends, family, and future?
Archimede LaLuce 
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