The SEC Wants a Real Friends and Family Exemption. Here Is What Changes If It Happens
By Hari Nathan Kalyan, Managing Attorney, Warren Kalyan.
Five Key Takeaways
- The SEC's small business forum recommended a real federal friends and family exemption. On July 27, 2026, the SEC published the formal report from its March 9, 2026 forum, and one headline recommendation asks the Commission to create a new exemption that would preempt state blue sky laws for these rounds.
- A separate petition asks the SEC to quadruple the Regulation Crowdfunding cap. Sherwood Neiss of Crowdfund Capital Advisors filed a rulemaking petition, docketed July 13, 2026, asking the Commission to raise the Reg CF offering limit from five million to twenty million dollars, with automatic inflation adjustments.
- None of this is law yet. Forum recommendations and rulemaking petitions start a process. The SEC still has to decide whether to propose a rule, take public comment, and adopt something final, and that can take months or never happen at all.
- Today's rules have not changed. A friends and family round still needs a federal exemption, almost always Rule 506(b), capped at 35 non accredited but sophisticated investors, no general solicitation, plus state by state blue sky notice filings for every investor's home state.
- Plan around today's cap, not tomorrow's proposal. If your growth plan assumes a twenty million dollar crowdfunding round, build your timeline around the current five million dollar Reg CF ceiling until a final rule says otherwise.
If you have ever raised money from a cousin, a former coworker, or a group of local investors who believe in what you are building, you have probably run into an uncomfortable truth. There is no such thing as a real friends and family exemption under securities law, at least not yet. What most small businesses actually rely on is Rule 506(b) of Regulation D, filed alongside compliance obligations in every state where an investor lives, commonly called blue sky law. It works, but it is more paperwork than most owners expect for what feels like an informal round among people who already trust you.
What the SEC Forum Recommended
That gap is now squarely on the SEC's radar. On March 9, 2026, the SEC held its 45th Annual Government Business Forum on Small Business Capital Formation, bringing together founders, investors, and securities lawyers to recommend changes to federal capital raising rules. On July 27, 2026, the SEC published the forum's formal report to Congress. Among the headline recommendations, forum participants asked the SEC to create a new federal friends and family exemption that would preempt state blue sky laws, and to raise the annual cap on Regulation Crowdfunding offerings from its current five million dollars to twenty million dollars. Participants also recommended preempting state blue sky laws for off exchange secondary trading in companies that publish Regulation A Tier 2 style disclosure.
The Crowdfunding Cap Push Already Has a Petition Behind It
The crowdfunding cap increase already has a formal push behind it. Sherwood Neiss of Crowdfund Capital Advisors filed a rulemaking petition with the SEC, posted to the agency's site on July 13, 2026, asking the Commission to raise the Reg CF offering limit from five million to twenty million dollars, with automatic inflation adjustments going forward. The petition cites the Commission's own data showing that more than forty percent of companies that hit the current five million dollar cap come back within a year for a follow on raise, pulling in a median of another three point one million dollars. The petitioner's argument is straightforward. Companies raising in the ten to twenty million dollar range tend to be past the earliest and riskiest stage, and forcing them to fragment a single financing into multiple offerings adds cost and delay without adding investor protection.
None of This Is Law Yet
That is worth saying plainly, because forum recommendations and rulemaking petitions are the beginning of a process, not the end of one. The SEC has to decide whether to open a formal rulemaking, publish a proposal, take public comment, and adopt a final rule. That can take months, and sometimes it does not happen at all. Right now, if you are raising money from friends, family, or a small group of local backers, you are still operating under the rules that exist today, not the ones the forum recommended.
So why should a business owner in Texas care about a proposal that has not become law. Because this is exactly the kind of signal that tells you where the rules are heading, and it changes how we advise clients who are planning a raise over the next year or two.
What Has Not Changed, Yet
If you are structuring a friends and family round today, the practical takeaways have not changed. You still need a federal exemption, almost always Rule 506(b) for a round involving people who are not all accredited investors, with a cap of thirty five non accredited but sophisticated investors and no general solicitation. You still need to track where each investor lives and satisfy that state's notice filing and fee requirements, even for a small check from a family member. You still need clean documentation showing the relationship between you and each investor, because a true 506(b) offering depends on there being no general advertising and a pre-existing relationship or reasonable belief in the investor's sophistication.
If you are planning a crowdfunding raise, the current five million dollar Regulation Crowdfunding cap is still the ceiling, and the individual investment limits tied to an investor's income and net worth still apply to non accredited backers. If your growth plan assumes you will need more than five million dollars in a single crowdfunding round, build your timeline around today's cap, not a twenty million dollar number that may or may not exist by the time you are ready to raise.
What is worth doing now, while this works its way through Washington, is planning ahead. If a federal friends and family exemption and blue sky preemption actually get adopted, the biggest winner is the founder who does not have to hire counsel in ten states to close a round that is mostly Aunt Linda and two old business partners. That is a real reduction in cost and delay for lower middle market companies that do not have a general counsel on staff. We are tracking this rulemaking closely, and we will flag it again the moment the SEC moves from recommendation to proposed rule.
Our Advice for Now
Our advice to founders and operators raising money from people who know them personally is the same as it has always been. Treat a friends and family round with the same discipline as an institutional one. Pick the right exemption, document the relationship, file where you need to file, and do not assume that because the money is coming from someone who trusts you, the securities laws do not apply. They do, until Washington says otherwise.
Our team at Warren Kalyan works with founders and operators on friends and family financing rounds, securities exemption compliance, and blue sky filings across multiple states, and we are watching this rulemaking closely as it develops.
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General information only, not legal advice for your specific situation.