Hello, this is Hall T. Martin with the Startup Funding Espresso — your daily shot of startup funding and investing.
Securities law allows for startups to take investments from family and friends.
Here are the relevant exemptions.
Rule 504 is The Seed Fund Exemption
This allows you to raise up to $ 1 million within a 12-month period.
Friends and family usually do not meet the accredited investor criteria. If the investors are non-accredited and non-sophisticated, then they must be people you already know and the stock must be restricted from resale.
If the investors are accredited, such as angels, then your pitch audience can be anyone and the stock does not need to be restricted.
Under Rule 505, you can raise up to $ 5 million in a 12-month period. You can raise the money from a combination of an unlimited number of accredited investors, and/ or up to 35 unaccredited investors.
The stock must be restricted from resale. You cannot advertise and you must provide audited financial statements.
Rule 506 allows any amount of securities to be issued to an unlimited number of accredited investors and up to 35 sophisticated non-accredited investors. The seller of the stock must be available to answer questions about the securities and company. Audited financial statements must be provided to prospective investors. The stock must be restricted from resale. No general solicitation or advertising may be done.
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