Choose a securities-law exemption before asking anyone to invest, then select and document an instrument that matches the company’s financing plan and the investors’ expectations. “Friends and family” describes who the investors are; it is not, by itself, a federal securities exemption. The right structure depends on how you approach investors, who they are, and the terms you offer.
Start with the offering rules, not the relationship
This article covers U.S. federal securities rules. State notice filings, entity and tax questions, and laws outside the United States may require separate, fact-specific advice.
The U.S. Securities and Exchange Commission says that “the federal securities laws do not differentiate in the same way” based on whether a financing is called a friends-and-family, angel, seed, or Series A round. In other words, the round’s informal name does not make the offering exempt; the company still needs to qualify for an available exemption. See the SEC’s Early-Stage Investors guidance.
That distinction matters before outreach. An exemption may constrain whether you can promote the investment publicly, who may buy, what information you must provide, and what filings are due. An instrument such as a SAFE, note, or stock purchase agreement documents investment terms; it does not, on its own, supply the securities-law exemption.
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Choose the federal offering path before contacting investors
The solicitation plan and the investor pool need to fit the exemption. The following are common paths described by the SEC, but they are not interchangeable shortcuts.
Rule 506(b): private outreach, with conditions for non-accredited investors
- General solicitation and advertising to market the securities are not allowed.
- The rule permits an unlimited number of accredited investors and no more than 35 non-accredited investors in any 90-calendar-day period.
- Each non-accredited investor must meet the applicable sophistication standard. The issuer must also provide specified disclosure and financial-statement information before the sale.
- The offering is subject to bad-actor disqualification provisions, and securities sold under the exemption are restricted.
The 35-person ceiling is not the only test for accepting non-accredited friends or relatives. The sophistication, disclosure, and solicitation conditions also matter. Have counsel assess the actual investor group, prior communications, related offerings, and documents. The SEC’s Rule 506(b) guidance explains these conditions.
Rule 506(c): public solicitation, accredited purchasers only
Rule 506(c) permits general solicitation, but every purchaser must be accredited, and the issuer must take reasonable steps to verify each purchaser’s accredited status. It is not a route for a mixed group that includes non-accredited friends or family. See the SEC’s Exempt Offerings overview.
Other exemptions have their own requirements
The SEC also identifies Regulation Crowdfunding, Regulation A, Rule 504, and certain intrastate routes. Regulation Crowdfunding allows an offering of up to $5 million through an internet-based platform and an intermediary registered as a broker-dealer or funding portal; it has separate offering and disclosure requirements. Those features do not make it a casual substitute for a privately documented round. The SEC’s Exempt Offerings overview describes these routes.
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Pick an instrument that fits the company’s obligations and the investor’s expectations
The SEC identifies loans, convertible debt, and equity as possible forms of investment, depending on the needs of the company and investors; it does not rank one as universally best. The comparison below is about issues to resolve in the documents, not a recommendation. The SEC’s Early-Stage Investors guidance names these forms.
| Structure | Terms to make explicit | Main trade-offs to assess |
|---|---|---|
| Loan | Principal, interest, repayment schedule, maturity, defaults, security or guarantees, and whether repayment depends on company cash | Near-term repayment burden, creditor rights, and whether the startup can realistically repay |
| Convertible debt | Loan terms plus the conversion trigger, conversion price or discount/cap mechanics, maturity consequences, and what happens if no priced financing occurs | Repayment exposure versus future equity conversion, dilution, timing, and complexity |
| Equity | Share class and number, price, ownership calculation, voting or information rights, transfer restrictions, and future dilution | Immediate ownership and governance, valuation clarity, dilution, and administrative burden |
If you are considering a SAFE
Do not assume every SAFE form has the same terms or that using one removes securities-law obligations. Review the specific document’s conversion and liquidity provisions, and make sure the offering independently fits an exemption. The SEC guidance cited above names loans, convertible debt, and equity but does not compare or endorse SAFE templates.
Explain the downside and document the deal
Close relationships do not make a startup investment less risky. The SEC advises founders to disclose investment risks clearly, including what could happen if the company does not succeed. See its Early-Stage Investors guidance.
Before someone commits, explain in plain language that the company could fail, the investment may be illiquid, and the investor could lose the entire amount. Set out the investor’s rights and obligations, including repayment or conversion mechanics where relevant, ownership and dilution where relevant, and what happens if the company does not reach the milestone investors expect. Do not let personal familiarity substitute for a shared understanding of the written terms.
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Use a closing and filing process you can verify
- Set the facts. Identify the issuing entity, target amount, investor locations and status, previous or concurrent offerings, and whether any public communication about the securities has already occurred.
- Have counsel select the exemption before outreach. Match planned communications and purchaser eligibility to the applicable route. Federal exemption analysis does not settle state notice filings, fees, entity authorization, tax treatment, fiduciary duties, investor rights, or accounting questions.
- Choose and explain the instrument. Put repayment, conversion, price, dilution, ownership, and governance terms in understandable documents. Use a coherent document set for comparable investors unless counsel advises otherwise.
- Keep a complete closing record. Retain signed documents, each amount and commitment date, investor representations, and records showing delivery of required disclosure. For Rule 506(b), the SEC says the Form D clock runs from the first sale, which it describes as when the first investor becomes irrevocably contractually committed.
- Calendar required notices. For a Rule 506 offering, file Form D with the SEC within 15 calendar days after the first sale. Form D is a notice filing, not SEC approval. Rule 506 preempts state registration and review, but state notice filings and fees may still apply; confirm the requirements for every relevant jurisdiction. See the SEC’s Rule 506(b) guidance.
- Get advice before changing course. A change in public solicitation, the investor pool, instrument terms, or offering timeline can affect the exemption analysis. Ask counsel before making a change.
There is no source-backed typical round size or success rate established here. The Rule 506(b) investor ceiling and Form D deadline are legal requirements, not evidence of fundraising norms.
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