How are friends and family investment rounds structured that it is legal?


To my knowledge, to invest in a private company in the United States, a person has to be an accredited investor.

But what about these friends and family rounds that I hear so much about - friends and family are usually not accredited investors, so how is this legal?



asked Dec 5 '12 at 03:25
1,821 points
Get up to $750K in working capital to finance your business: Clarify Capital Business Loans

1 Answer


In a nutshell...

(1) A company cannot sell securities (like stock) unless the stock has either been registered (i.e. the company has had its IPO) or there's an exemption from the registration requirement

(2) The most common exemption is something called Regulation D.

(3) Regulation D allows sales to non-accredited investors as long as those investors get a fairly substantial set of information about the company.

(4) Regulation D allows sales to accredited investors, in which case the company has to disclose a lot less information.

(5) #4 above is why people sometimes think that only accredited investors can invest in private stock offerings.

(6) There are other exemptions which may apply. For example, you'll hear references to Section 4(2) of the Securities Act of 1933, which contains an exemption for sales made "not involving any public offering." This exception is often used for early-stage friends-and-family offerings.

answered Dec 5 '12 at 05:09
Chris Fulmer
2,849 points
  • wow amazing answer, thank you! – Genadinik 8 years ago

Your Answer

  • Bold
  • Italic
  • • Bullets
  • 1. Numbers
  • Quote
Not the answer you're looking for? Ask your own question or browse other questions in these topics: