In the earliest stage of a startup, founders often rely on money from friends and family. Budgets are tight, good lawyers can feel out of reach, and mentors may not be in place yet. The result is that key legal requirements for friends and family financing are sometimes missed.
Securities Regulations
Most jurisdictions now have modern securities rules that make it reasonably straightforward to raise startup capital from friends and family if you follow the process. British Columbia is a good example, where recent updates have improved clarity for early stage fundraising.
Important: Every securities transaction, even selling shares to relatives, is covered by securities legislation and is subject to regulatory review and enforcement. You cannot just take the money, no matter how young your company is.
Prospectus Exemptions
By default, selling any security, including common or preferred shares, requires a prospectus. A prospectus is a complex legal document that can run 50 pages even for a startup, and preparing one often costs more than $50,000. The good news is there are specific exemptions that allow fundraising without a prospectus, including friends and family and accredited investor paths.
If you plan to sell shares, make sure you understand the exact exemption you will use. In British Columbia, common exemptions include:
- Private issuer exemption
- Family, friends, and business associates exemption
- Employee, director, officer, and consultant exemption
- Accredited investor exemption
- $150,000 exemption
- Offering memorandum exemption
Reporting Obligations
Reporting may be required after you use an exemption. Except for the private issuer and the employee, director, officer, and consultant exemptions, a company must file a report of exempt distribution with the Securities Commission within ten days of each distribution under an exemption.
The BC Securities Commission website provides readable guidance on startup funding, including definitions you must understand, such as close personal friends or close business associates. Enforcement activity has increased in recent years, so precision matters.
Other Legal Requirements
Any company selling shares must be properly incorporated, have up-to-date articles, and maintain an accurate share register. Shares issued under an exemption should carry the required resale restrictions. To protect the company, the founders, and the directors, all investors should sign a current subscription agreement tailored to the specific exemption and investor type.
Practical Advice
Unless you have completed this type of financing several times and are fully current on the rules, get help. Work with a qualified lawyer and, ideally, an experienced mentor. The upfront guidance will save time, reduce risk, and keep your round compliant.