This is from a blog post PPM Law

A friends and family round is still a sale of securities, which means securities law applies to it exactly the way it applies to a raise from strangers. The relationship does not create an exemption. To raise from people you know legally, you sell under a real exemption (most often Regulation D Rule 506(b)), give every investor honest written disclosure, file a Form D and any required state notices, and keep general solicitation out of it. Done right, the same documents that keep you compliant also protect the relationships you care about most.

This is one of the few moments in a capital raise where the legal stakes and the personal stakes point in the same direction. For the founder, syndicator, or fund manager, getting the structure right is what prevents a soured deal from becoming a lawsuit. For the friend or family member writing the check, the documents are what turn a favor into an informed decision. Both sides are served by the same thing: doing the early raise the way you would do a professional one.

Is a friends and family round a legal category? No.

“Friends and family round” is a phrase from the startup and syndication world, not a section of the securities laws. There is no rule that says money from people you know is exempt, lightly regulated, or off the regulators’ radar. When you give someone equity, a promissory note, or an interest in your fund in exchange for their money, you are selling a security, and that triggers the same federal and state rules that govern any private offering.

Read full article: https://ppmlawyers.com/friends-and-family-rounds/