The Essence of Friends and Family Fundraising
Friends and family fundraising, as the name suggests, involves raising capital from your existing, immediate social circle, including friends, family members, and close acquaintances. It's a time-honored tradition in the entrepreneurial world and can be a crucial stepping stone for many startups.Accreditation.Generally, the Securities Act of 1933 requires any sale of securities to be registered with the Securities and Exchange Commission (SEC). Additionally, investors are typically required to be accredited. Meaning the investor meets specific criteria related to income, net worth, or professional experience, as defined by the SEC. This accreditation allows investors access to investment opportunities that may not be available to the general public due to their complexity or risk level. However, there are a few exemptions from registration and accreditation.
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506
Rule 506 allows a startup to collect investment from up to 35 non-accredited investors in its initial round of fundraising. There is a requirement that your non-accredited investors have
“such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment.” This is essentially forbids founders from taking advantage of inexperienced investors.
504
Rule 504 allows this first round of investment to raise up to $1 million over 12-months. The caveat here is that all investors must be a pre-existing connection - meaning you must know and have a relationship with them before soliciting the investment. Additionally, you cannot broadcast that you are seeking investment.
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