Raising Money From Friends And Family: Unlocking the Legalities of Raising Funds

You've got a dream, a business or real estate venture, and you're considering raising funds from your circle of friends and family. It's a common way to get started, but it's crucial to understand the legalities involved.When raising money, it's not as simple as taking a loan. You're dealing with securities and need to comply with specific rules. There are two main ways people typically raise funds. The first is through a debt agreement, where you promise to return the money borrowed plus an agreed-upon interest. The second is through equity, where you're selling a percentage of your business in return for the investment.However, both these methods make your investors passive, meaning they're relying on you to do the work, which instantly classifies it as a security. If your investors are actively involved in your venture, it's not a security but a joint venture or partnership.When it comes to the legalities of raising funds, it might seem tempting to save a few bucks and wing it on your own. But, playing fast and loose with securities can land you in hot water, possibly even barring you from raising money in the future. Hiring a reputable attorney to set up your fund correctly is a solid investment in your venture's future.Remember, when dealing with venture capitalists or angel investors, they typically take an active role in your business, which is why it doesn't classify as a security. When raising funds from friends and family, it's usually a passive investment, making it a security that needs to adhere to SEC regulations or qualify for an exemption.