Raising Friends and Family Capital: Avoiding Securities Violations in Informal Rounds

For many entrepreneurs, the first infusion of capital doesn’t come from a venture capitalist or angel investor—it comes from people they know personally. Friends and family often step up to support a new business idea, offering financial backing based on trust and relationships rather than formal due diligence. Yet what many founders overlook is that even small, informal fundraising efforts can trigger securities law compliance obligations.

Under both federal and Florida law, offering ownership interests or convertible debt in exchange for investment is considered the sale of a “security.” This means that, unless the offering qualifies for an exemption, it must be registered with the Securities and Exchange Commission (SEC) and the Florida Office of Financial Regulation. Failing to do so, even unintentionally, can result in severe penalties, rescission rights for investors, and lasting damage to the business.

This article examines the legal landscape surrounding friends-and-family fundraising, the common pitfalls entrepreneurs encounter, and how guidance from an experienced Florida business and corporate lawyer can help protect both founders and investors from inadvertent violations.

The Legal Reality: Friends and Family Rounds Are Still Securities Offerings

Many founders assume that because the money comes from personal relationships, it doesn’t count as a securities transaction. Unfortunately, that assumption is one of the most common and costly mistakes in startup fundraising.

Under Section 2(a)(1) of the Securities Act of 1933, the term security broadly includes “any note, stock, bond, investment contract, or evidence of indebtedness.” When a person invests money in a business with the expectation of profit based on the efforts of others, the arrangement likely qualifies as an “investment contract” under the Howey Test established by the U.S. Supreme Court in SEC v. W.J. Howey Co., 328 U.S. 293 (1946).

This means that even if your investors are relatives or lifelong friends, selling them shares, LLC interests, or convertible notes is a securities transaction. Unless properly exempted, you could be in violation of both federal securities laws and Florida’s blue sky laws, including Fla. Stat. § 517.07, which prohibits the sale of unregistered securities in the state.

Common Compliance Pitfalls in Informal Fundraising

Informal rounds often begin with good intentions. For example, an uncle writes a check, or a college friend invests in exchange for “a small piece” of the company—but these scenarios are legally no different from larger private placements. The most common compliance issues include:

1. Lack of Written Agreements
   Many founders rely on verbal understandings or casual emails to document investments. Without a formal subscription agreement or disclosure statement, the company has no clear record of what was offered, what representations were made, or what rights investors have. This opens the door to later disputes or claims of fraud if expectations differ.
2. No Securities Exemption
   Every securities offering must either be registered with the SEC or qualify for an exemption. Friends-and-family rounds may qualify for a private placement exemption under Rule 506(b) of Regulation D, but the company must still comply with investor eligibility requirements and file a Form D notice with the SEC.

Failing to file or verify exemption eligibility can subject the company to enforcement actions and investor rescission rights under Fla. Stat. § 517.211.

3. Mixing Accredited and Non-Accredited Investors
   Friends and family rounds often include both accredited (wealthy or financially sophisticated) and non-accredited investors. Under Rule 506(b), non-accredited investors must receive specific written disclosures similar to those required in registered offerings. Many startups neglect to prepare these disclosures, exposing themselves to liability.
4. Improper Solicitation or Advertising
   Posting about fundraising on social media, crowdfunding platforms, or even LinkedIn can inadvertently turn a private offering into a public solicitation, disqualifying it from exemption. Once that happens, the company may need to register the offering—a costly and complex process few startups can afford.

Disclosures and Risk Management: Transparency Is Essential

Securities laws exist primarily to protect investors through disclosure. Even in small private offerings, founders must provide sufficient information about the company’s financial condition, business risks, management, and intended use of funds.

Typical disclosures for a compliant private placement include:

• The nature of the business and its current operations;
• Risks associated with the investment;
• Details about existing debt and liabilities;
• Management team experience and compensation;
• Ownership structure and capitalization; and
• Terms of the offering, including rights, restrictions, and dilution potential.

In Florida, companies must also comply with state-level notice filings when relying on certain federal exemptions, including Rule 506 offerings. Failure to make timely filings with the Florida Office of Financial Regulation (OFR) can result in administrative penalties and potential civil liability.

By ensuring transparency and documentation, founders not only comply with the law but also build trust with their investors.

The Role of Legal Counsel in Structuring Friends and Family Rounds

Working with an experienced Florida business and corporate lawyer ensures that informal fundraising efforts are structured correctly from the start. Counsel can help with:

• Determining eligibility for exemptions under federal Regulation D or Florida’s intrastate offering provisions;
• Preparing offering documents, including private placement memoranda, subscription agreements, and investor questionnaires;
• Filing Form D and state notices with the appropriate agencies;
• Drafting disclosure statements tailored to the company’s risks and structure; and
• Establishing corporate governance procedures to document board approvals and maintain compliance records.

Attorneys also help founders avoid inadvertent misrepresentations—such as overstating potential returns or minimizing risks—that could later be deemed fraudulent under Rule 10b-5 of the Securities Exchange Act of 1934.

Managing Relationships While Maintaining Compliance

When raising capital from friends or relatives, the dual nature of personal and financial relationships can create added complexity. Founders may feel uncomfortable discussing legal risks or delivering formal disclosure documents. Yet doing so protects everyone involved.

Establishing clear boundaries between personal relationships and investment relationships demonstrates professionalism and helps avoid misunderstandings. Investors should understand that they could lose their entire investment, and founders should document that acknowledgment in writing.

A well-prepared friends-and-family offering allows founders to focus on growth rather than worrying about regulatory exposure or strained relationships later.

Contact The Law Offices of Clifford J. Hunt, P.A.

At The Law Offices of Clifford J. Hunt, P.A., we help Florida entrepreneurs and early-stage companies navigate the complexities of raising private capital. From structuring friends-and-family rounds to preparing compliant private placement documentation, we provide the legal guidance necessary to protect your business and your investors.

With more than 35 years of experience in corporate and securities law, our firm ensures that your fundraising efforts meet both federal and Florida legal standards. Before accepting a check or promising equity, consult a trusted Florida business and corporate lawyer who can help you raise capital the right way—safely, legally, and strategically.

Sources:

• Securities Act of 1933, 15 U.S.C. § 77a et seq.
• Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq.
• Florida Securities and Investor Protection Act, Stat. § 517.011 et seq.
• SEC v. W.J. Howey Co., 328 U.S. 293 (1946)
• S. Securities and Exchange Commission, Regulation D Offerings
• Florida Office of Financial Regulation, Securities Registration and Exemption Filings