“It’s just my uncle, my brother-in-law and two old friends — it’s not like we’re selling shares to the public.” That sentence, or one like it, sits at the start of a remarkable number of securities problems. Money from friends and family is still an investment, the paper you give them is still a security, and regulators in the United States and Canada can — and do — treat the raise as exactly what it is: a securities offering.
A security is a security, whoever buys it
Securities law does not start with who the investor is. It starts with what is being sold. In the United States, the Securities Act of 1933 requires any offer or sale of securities to be registered with the SEC unless an exemption applies — and the definition of a “security” is deliberately broad, covering shares, notes, and investment contracts. Canada runs on the same logic: provincial and territorial securities laws, coordinated through the Canadian Securities Administrators and enforced in Quebec by the Autorité des marchés financiers (AMF), generally require a prospectus for a distribution of securities unless an exemption is available.
Nowhere in either system is there a line that says “unless the buyer is your cousin.” The relationship between founder and investor is, at most, one factor in fitting a particular exemption. It is never a free pass out of the regime.
“Friends and family” is a defined term, not a feeling
Here is the detail that surprises founders most: in Canada, there actually is a “family, friends and business associates” exemption — and it proves the opposite of what people assume. The exemption exists precisely because those sales are securities offerings that need one. And its definitions are narrow. It covers specified family relationships and people who genuinely qualify as a “close personal friend” or “close business associate” — a relationship of real duration and closeness, not someone you met at a conference or a friend of a friend. In several provinces, investors using this exemption must also sign a prescribed risk acknowledgement confirming they may lose their money and are buying without the protections of a prospectus.
The United States tells the same story differently. There is no general federal “friends and family” exemption at all. A small early raise typically fits inside a private-placement exemption such as Regulation D — which comes with its own conditions on who can invest, what can be said, and what must be filed. Founders who assume the label does the legal work are relying on an exemption that does not exist.
Why the misconception is dangerous
The costs of getting this wrong are personal, and they arrive late — which is why the myth survives. Three consequences show up again and again.
First, rescission. An investor who bought under a defective exemption may have the legal right to unwind the purchase and demand their money back — with interest — at exactly the moment the company can least afford it. Second, personal liability. When a company is young and thinly capitalized, regulators and courts look through it to the founders and directors who made the offers. “The company did it” is a weak shield when the company is you and two laptops. Third, enforcement and reputation. The SEC, the AMF and their fellow regulators publish their enforcement decisions. A founder who treated an early raise casually can spend years explaining an order that a few hours of legal advice would have prevented — and investors doing due diligence on a later round will find it, and price it, or walk away.
There is also a quieter damage: the relationships themselves. Money invested informally, on a handshake, with no documents explaining the risk, becomes a family grievance when the startup does what most startups do. Paper protects friendships at least as much as it protects founders.
Doing the first raise properly
None of this is an argument against raising from people who know you. Early money from believers is how many good companies start. It is an argument for treating that money with the respect the law — and the relationship — requires.
In practice that means five things. Identify the actual exemption you are relying on, in writing, before money moves — accredited investor, family-friends-and-business-associates, Regulation D, or another route that fits your facts. Use real documents: a subscription agreement describing the investment and its risks, signed by every investor, related or not. Take no money from anyone whose eligibility you have not actually checked; “he said he’s accredited” is not a check. Say nothing publicly that turns a private exemption into a public solicitation — posting your raise to a wide audience can destroy the exemption you were counting on. And keep records: who invested, when, how much, under which exemption, with copies of everything signed.
The cost of this discipline is modest — a securities lawyer for a few hours at the stage when the amounts are still small. The cost of skipping it compounds silently, in personal liability and poisoned relationships, until it is collected all at once. Friends and family deserve better than being the source of your first regulatory problem. Treat their money as what the law says it is: a securities offering, done properly.
Jean-Francois Amyot is Managing Director of Wellington Peel LLC and author of The Art of War Remastered.
