Why Friends and Family Fundraising is Hard
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Why is Friends and Family fundraising so difficult?
Pre-seed founders often run into challenges raising the first dollars into their startup from friends and family. Often, they’re trying to raise small amounts from people without a ton of money. Unfortunately, the current regulations are designed to facilitate raising large amounts from people who have a lot of cash or assets. When founders don’t have access to a network of high-net worth family and friends they’re often left spinning their wheels on how to effectively and compliantly raise.
TLDR: When a startup raises money by selling ownership—equity or the promise of equity—they’re selling securities. The SEC regulates securities sales, and while there are exemptions that make it easier for private companies to raise capital, those exemptions are primarily built for accredited investors–people having over $1 million in net worth (excluding their home), or at least $200K in annual income.
That means if you’re trying to raise small checks from people who aren’t accredited, you’re looking at compliance costs that don’t make sense relative to the capital you’re raising. In practice, that means friends and family contributions often come in as loans rather than equity meaning it’s on the founder personally to make sure early backers share in the success of the business down the line.
How startups properly take money from Accredited Investors.
The most common exemption used by startups is Rule 506(b) of Regulation D. It allows you to raise unlimited capital from accredited investors with a relatively simple process: you file a Form D with the SEC and move on. 506(b) has federal preemption, meaning in most states you won’t need to file separately or jump through extra hoops—just a handful still require a notice or fee.
While 506(b) technically allows for up to 35 unaccredited investors, there’s a huge catch: once you take even one, you’re required to provide extensive information disclosures that can quickly balloon the legal and compliance costs.
Other exemptions like Rule 504 allow raising from any investor but lack federal preemption. That means dealing with state-by-state “blue sky” laws. If you’re pulling in checks from more than one or two states, compliance gets expensive fast. You could easily spend more than you raise.
That leaves two realistic paths for unaccredited money:
Loan: Friends and family can loan money to you or the business. It’s straightforward and compliant. There’s no ownership or upside participation, but it’s a viable way to get off the ground. If your startup does well, it’s on you to take care of those early backers.
Reg CF: Regulation Crowdfunding allows anyone to invest in exchange for equity, but only through SEC-registered intermediaries like Wefunder, StartEngine, or Republic. These platforms handle compliance and offer a place for investors to commit. But they expect you to show up with a crowd—most won’t open your campaign until you’ve already secured $50K in commitments.
Also, keep in mind some people might be accredited and not realize it. Equity in a late-stage startup, rental properties, ownership stakes in other businesses—all of that can count toward net worth. It’s worth a second look.
There’s no obvious path today for non-accredited friends and family to invest for equity in your startup. But knowing the ropes helps avoid costly missteps.
We built Mission Control to give founders clarity, tools, and guidance from day one. Whether you’re structuring a friends and family round or exploring Reg CF, we’re here to help you get it right.
If you want to make sure the rest of your startup is set up correctly, check out our free Corporate Diligence Report tool. It evaluates how investors will perceive your corporate structure—including board makeup, cap table, and filing history—and gives you detailed feedback on each point so you can address any red flags before they become deal-breakers.
Gust's New Corporate Diligence Review Tool can identify preventable corporate structure issues that come up in diligence, and help guide founders towards fixing them.
This article is intended for informational purposes only, and doesn't constitute tax, accounting, or legal advice. Everyone's situation is different! For advice in light of your unique circumstances, consult a tax advisor, accountant, or lawyer.