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So is it illegal to have your acquaintances and family invest in your startup? If not, then have all startups been breaking laws all along? If not, then what'

by gm 14y ago

So is it illegal to have your acquaintances and family invest in your startup? If not, then have all startups been breaking laws all along? If not, then what's the difference? The link you mention does not address that issue at all (it just defines what an accredited investor is)

excuse-me 14y ago
Technically it often is. The SEC never really cared because historically friends+family funded businesses didn't end up on the market. Your typical neighborhood Italian restaurant doesn't IPO. If it did, and grandma who gave you her famous meatball recipe, turns up with her team of IP lawyers things will get interesting The difference here is that you are inviting 1000s of random people to invest. Then even assuming you are totally honest and above board - once you are marginally succesfull the same VCs will come and screw these investors in the same way that they screw foudners.
JumpCrisscross 14y ago
No it is not, you just have to provide additional disclosure and follow your state's "blue sky" laws. These are just a headache to keep up with which is why it can make an exit or VC raise down the line a bit harder.
- wtvanhest 14y ago
  Blue Sky laws typically require investors to be accredited unless there are exceptions. Some states may allow for non-accredited investors to invest in startups, but I don't know of any. One area that may or may not work would be if your family member loaned you the money personally. That isn't considered an investment since it is a personal loan. But, in a personal loan, they couldn't ask for equity since that would be an investment.
dandelany 14y ago
My understanding is that SEC Rule 506[1] allows you to have up to 35 "sophisticated" but non-accredited investors. The catch is that you "cannot use general solicitation or advertising to market the securities" - which means friends and family who you approach directly are fine, but a public crowdfunding campaign is not. The new crowdfunding rules will allow companies to publicly solicit a much larger number of investors, as long as the company is raising <$1 million, and each investor is investing <$10k or 10% of their annual income, whichever is lesser. Disclaimers: This is an oversimplification, the law has been passed but the SEC rules have yet to be written and enacted, IANAL and really don't know what I'm talking about. [1] http://www.sec.gov/answers/rule506.htm http://www.sec.gov/answers/rule506.htm

by gm 14y ago

excuse-me 14y ago

Technically it often is. The SEC never really cared because historically friends+family funded businesses didn't end up on the market. Your typical neighborhood Italian restaurant doesn't IPO. If it did, and grandma who gave you her famous meatball recipe, turns up with her team of IP lawyers things will get interesting The difference here is that you are inviting 1000s of random people to invest. Then even assuming you are totally honest and above board - once you are marginally succesfull the same VCs will come and screw these investors in the same way that they screw foudners.

JumpCrisscross 14y ago

No it is not, you just have to provide additional disclosure and follow your state's "blue sky" laws. These are just a headache to keep up with which is why it can make an exit or VC raise down the line a bit harder.

wtvanhest 14y ago
Blue Sky laws typically require investors to be accredited unless there are exceptions. Some states may allow for non-accredited investors to invest in startups, but I don't know of any. One area that may or may not work would be if your family member loaned you the money personally. That isn't considered an investment since it is a personal loan. But, in a personal loan, they couldn't ask for equity since that would be an investment.

dandelany 14y ago

My understanding is that SEC Rule 506[1] allows you to have up to 35 "sophisticated" but non-accredited investors. The catch is that you "cannot use general solicitation or advertising to market the securities" - which means friends and family who you approach directly are fine, but a public crowdfunding campaign is not. The new crowdfunding rules will allow companies to publicly solicit a much larger number of investors, as long as the company is raising <$1 million, and each investor is investing <$10k or 10% of their annual income, whichever is lesser. Disclaimers: This is an oversimplification, the law has been passed but the SEC rules have yet to be written and enacted, IANAL and really don't know what I'm talking about. [1] http://www.sec.gov/answers/rule506.htm http://www.sec.gov/answers/rule506.htm