Taking money from friends and family is a securities transaction

By David J.S. Madgett

Minnesota attorney, license no. 390494 · Published August 7, 2026

Here is the sentence that surprises founders: when your uncle gives you $25,000 for a piece of the business, you have sold a security. Not a loan, not a gift — a security, subject to state and federal securities law, with registration requirements unless an exemption applies.

This is true whether the paperwork is a subscription agreement or a text message. It is true for an LLC membership interest as much as for corporate stock. And it stays true when the business fails and your uncle wants his money back, which is generally when anyone investigates the question.

Why it matters more than it sounds

Securities law is not primarily criminal for a small honest business. What it does is give the investor remedies. An investor in an unregistered, non-exempt offering may have a statutory claim to get their money back — regardless of whether the business was well run, regardless of whether anyone lied, and often regardless of how much time has passed.

That is a materially different risk than “the business did not work out.” It converts an equity investment, which is supposed to be at risk, into something closer to a demand note.

MNvest: Minnesota’s own exemption

Minnesota created an intrastate crowdfunding exemption at Minn. Stat. § 80A.461. It is genuinely useful and almost nobody knows it exists.

Who qualifies. The issuer must satisfy federal Regulation 147A and have its principal place of business in Minnesota at the time of any offers and sales. It must also meet one of four Minnesota-connection tests:

• 80% of consolidated gross revenues from Minnesota operations;
• 80% of assets located in Minnesota;
• intent to use 80% of net proceeds in Minnesota; or
• a majority of employees based in Minnesota.

Investment companies and SEC-reporting companies are excluded, and an issuer cannot limit its liability for fraud or misrepresentation.

How much you can raise, per 12 months. Two tiers, and the difference is your accounting:

• $2,000,000 if the financial statements are audited by a CPA, or reviewed under AICPA standards; or
• $1,000,000 if they are neither audited nor reviewed.

A million dollars of additional capacity for a review engagement is, for most companies raising at that scale, an easy trade.

Per-investor limits. No single non-accredited purchaser may buy more than $10,000. Accredited investors have no stated limit under the exemption.

The portal. Offerings run through a portal that must take reasonable steps to verify the purchaser is a Minnesota resident and must require an affirmative acknowledgment of the risks. The portal may not contain “MNvest” in its URL.

Filing. Before offering, the issuer files a notice of claim of exemption, a copy of the disclosure document, and a $300 filing fee with the commissioner, generally at least ten days in advance. A portal operator files separately with a $200 fee.

What MNvest is and is not good for

It fits a business with a genuine Minnesota community around it — a brewery, a co-op grocery, a neighborhood restaurant, a local manufacturer — where a few hundred people would each put in a modest amount because they want the thing to exist. It is a poor fit for a company that intends to raise venture capital later, because a cap table with 300 small holders on it is a real complication.

Before any of this: fix your operating agreement

If you are taking outside money into an LLC, the chapter 322C defaults are actively hostile to what you are trying to do. Under Minn. Stat. § 322C.0502, a transferee of an interest gets distributions but does not become a member, cannot participate in management, and has no right to company records — while the transferor keeps voting. And under § 322C.0404, distributions default to equal shares per member, which means a new investor could be entitled to the same dollar amount as a founder.

None of that is what either side intends. It has to be written down before the money moves, not after. See what Minnesota law does if your operating agreement is silent.

The practical sequence

1. Decide whether it is debt or equity and say so plainly. A loan with a real note, a rate, and a maturity date is a different transaction with different rules.
2. Fix the operating agreement or the bylaws first, so the interest you are selling has defined economics and defined governance.
3. Identify your exemption before you take money — MNvest, a federal private-placement exemption, or something else. “We are too small for this to apply” is not an exemption.
4. Write down what you told them. Whatever disclosure you make, keep a copy. Most disputes turn on what the investor was told about risk.
5. Get advice if the amount is meaningful. Securities work is one of the few areas where the cost of doing it properly at the outset is reliably lower than the cost of unwinding it.

This page describes one Minnesota exemption in general terms. It does not address federal requirements beyond noting that they exist, it does not cover accredited-investor verification, and it is not a substitute for advice on your actual raise.