Can I raise money from friends and family legally?

Key facts

• Inviting someone to invest is a financial promotion: under s.21 FSMA 2000 it is a criminal offence unless an authorised firm makes or approves the communication, or an exemption applies.
• The Companies Act 2006 stops private companies offering shares to the public — a genuinely private circle is the lawful route.
• Friends and family who subscribe for shares may claim SEIS (50%) or EIS (30%) relief — but close relatives can be caught by HMRC's connection rules.
• File form SH01 at Companies House within one month of allotting the new shares.

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Is it legal to take investment from friends and family?

Yes. Private companies raise from private circles all the time, and nothing in UK law stops your old colleague or your sister buying shares in your startup. In fact the Companies Act 2006 prohibits a private limited company from offering its shares to the public — which is precisely why early-stage raises happen among people the founders actually know.

Two bodies of rules still apply, whoever the investors are. Company law governs the mechanics of issuing shares: approvals, registers, filings. Financial services law governs how you communicate the opportunity in the first place.

Get those two right and a friends-and-family round is one of the most straightforward raises you will ever do.

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When do the financial promotion rules apply?

Whenever you invite or encourage someone to invest. Under s.21 of the Financial Services and Markets Act 2000, communicating an "invitation or inducement" to invest is a criminal offence unless the communication is made or approved by an FCA-authorised firm, or a specific exemption in the Financial Promotion Order 2005 applies.

Friendship is not itself an exemption. Exemptions exist that can cover private raises — including ones tied to who the recipient is and how the communication is made — but they carry precise conditions and are easy to get wrong. The detail belongs in our dedicated guides on financial promotions and investor categories, linked below.

The practical rule of thumb: the smaller and more genuinely personal the circle, the lower the risk — and the moment you are tempted to post anywhere semi-public, stop and read the rules first.

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How should I structure the investment?

Decide deliberately between four shapes: a gift, a loan, shares issued now, or an advance subscription agreement (ASA). Ambiguity is the real enemy in family money — "I'll put in ten grand" must become a document saying which of the four it is.

Straight equity means agreeing a price today: a short subscription letter or agreement, board approval of the allotment, then the SH01 filed at Companies House within one month. An ASA takes the money now and defers pricing to your next round, converting at a discount (typically 10–20%).

A loan is debt — repayable, and never eligible for SEIS or EIS. It can still be the honest choice where a relative wants their money back one day rather than a stake in the ride.

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Can friends and family claim SEIS or EIS?

Often, yes — and it transforms the economics: SEIS relief is worth 50% of the amount invested and EIS 30%, provided the company and investor meet the schemes' conditions. Relief arises when shares are issued, so money paid under an ASA earns relief only at conversion.

The trap is closeness. HMRC restricts relief for investors too closely connected to the company, and the rules look through to "associates" — close family such as parents and children can be caught, while siblings and friends generally sit outside the net. The detail is beyond this guide: check HMRC's guidance or take advice before anyone banks on relief.

If relief matters to your backers, consider HMRC's advance assurance process — its advance indication that the company looks eligible — before the money moves.

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Worked example

Leila, founder of a language-learning app, raises £45,000 from her circle: £20,000 from her sister, £15,000 from a former colleague and £10,000 from her father. Every conversation is one-to-one with someone she knows personally, and the deck never goes anywhere public.

All three subscribe for shares at £0.50 each, so the board allots 40,000, 30,000 and 20,000 shares respectively and files the SH01 within the month. With HMRC advance assurance in place, her sister and former colleague could claim SEIS relief of £10,000 and £7,500 at the 50% rate. Her father's claim needs checking first — parents can fall within HMRC's connection rules — so nobody promises him 50% until an adviser has confirmed it.

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Where founders go wrong

• Pitching the whole group chat

  — a message inviting fifty semi-strangers to invest is a financial promotion under s.21 FSMA 2000. Keep it personal, and check the rules before widening the circle.

• Leaving the money undocumented

  — "we'll sort the paperwork later" turns family money into an argument about whether it was a gift, a loan or equity. Write it down before it moves.

• Promising SEIS to parents

  — close relatives can fail HMRC's connection rules. Verify the position before anyone relies on getting 50% back.

• Dressing a loan up as an investment

  — if it is repayable, it is debt: no SEIS or EIS, ever. Choose loan or equity deliberately and paper it accordingly.

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Related questions

Do the financial promotion rules really apply to my own family?

The s.21 FSMA 2000 restriction applies to invitations to invest and contains no general carve-out for people you know. Exemptions in the Financial Promotion Order 2005 can cover private raises, but each has precise conditions. Treat "it's only family" as a reason to check, not to skip checking. [More: What is a financial promotion and when do the rules apply to founders?]

Can my parents claim SEIS on their investment?

Not always. HMRC restricts relief for investors closely connected to the company, and the rules aggregate close family — parents and children in particular — as "associates". Whether a parent qualifies depends on the shareholding picture, so check HMRC's guidance or take advice before anyone counts on the 50%.

Should the investment be a loan instead of shares?

Sometimes — a loan suits a relative who ultimately wants the money back rather than a stake. But debt never qualifies for SEIS or EIS, and an unpaid family loan can sting more than equity everyone knew was at risk. Whatever you choose, record the terms in writing.

What paperwork does a family share issue need?

A subscription letter or agreement recording the price and share numbers, board approval of the allotment, updated statutory registers, and form SH01 filed at Companies House within one month. For an ASA, the agreement itself now, then the same allotment steps when it converts. [More: What is a subscription (investment) agreement?]

Can I pitch friends of friends or post the raise in a group chat?

Widening the circle raises the stakes: s.21 FSMA 2000 applies unless an exemption covers each recipient, and "basically a friend" is not a legal category. Before posting anywhere semi-public — including social media — read the rules on advertising a raise. [More: Can I publicly advertise that my startup is raising money?]

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Family money is the cheapest capital to raise and the most expensive to get wrong: the promotion rules carry criminal consequences, and a botched SEIS promise strains Sunday lunch for years. A SuLe solicitor can check the structure, the paperwork and the tax position before anyone transfers a penny. Book a free term sheet review and raise from the people you love without risking the relationship.

Keep reading: What is an advance subscription agreement (ASA)? · What is a priced round vs a convertible round? · What is a subscription (investment) agreement? · ASA vs convertible loan note — what's the difference? · Who counts as a high-net-worth or sophisticated investor? · What is SEIS and how does it work?

Primary sources: Companies Act 2006 · HMRC — Seed Enterprise Investment Scheme · Financial Services and Markets Act 2000, s.21