Securities law for raising money
Regulation D, Rule 506(b) and 506(c), accredited investors, Form D, state notice filings, Regulation Crowdfunding and Rule 701.
Every SAFE, note and share a startup sells is a security, and the Securities Act requires a security to be registered unless an exemption applies. Startups use exemptions: Regulation D for investors, Regulation Crowdfunding for the public, Rule 701 for employees. Securities bought under Regulation D are restricted — they can't be resold without registration or another exemption.
Most startup rounds are Rule 506(b): accredited investors, no public advertising, and a Form D within 15 days of the first sale.
Rule 506(b)
- Good at
- No limit on the amount
- Unlimited accredited investors
- No verification step like Rule 506(c)'s
- Watch for
- No general solicitation or advertising
- Non-accredited purchasers (at most 35 in 90 days) need disclosure and sophistication
- Best for
- Most SAFE and priced rounds
Rule 506(c)
- Good at
- General solicitation and advertising allowed
- No limit on the amount
- Watch for
- Every purchaser must be accredited
- Reasonable steps to verify each one
- Best for
- A round announced in public — a demo day post, a website
Regulation Crowdfunding
- Good at
Open to non-accredited investors
- Watch for
- $5 million in 12 months
- An intermediary and ongoing disclosure
- Best for
- Raising from customers and the public
Wrong
Posting "we're raising a seed round, DM me" and closing under Rule 506(b).
Right
Posting the round publicly means Rule 506(c): accredited purchasers only, each verified.
Rule 506(b)'s count of 35 is of non-accredited purchasers: Rule 501(e) leaves accredited investors out of it.
In this lesson: Form D and state notice filings, Regulation Crowdfunding, and Rule 701 for employee equity.
Pages in this lesson
3 pages go deeper, about 11 minutes in all. Read them in order, or open the one you need.
Where this lesson's rules come from
The sources behind this lesson's requirements, by kind. Anything marked as a convention is ours, not the rule-maker's.
- SEC
- 17 CFR §230.506(b)(2)(i) (opens in a new tab)Rule 506(b): unlimited accredited investors, at most 35 others, no general solicitationFree to read
- 17 CFR §230.506(c)(2)(i)–(ii) (opens in a new tab)Rule 506(c): advertise openly, sell only to verified accredited investorsFree to read
- 17 CFR §230.501(a)(5) (opens in a new tab)Accredited investor: the net worth test, primary residence excludedFree to read
- 17 CFR §230.501(a)(6) (opens in a new tab)Accredited investor: the income test, $200,000 alone or $300,000 jointFree to read
- 17 CFR §230.502(c) (opens in a new tab)No general solicitation, except under Rule 506(c)Free to read
- 17 CFR §230.502(d) (opens in a new tab)Securities bought in a Reg D offering are restrictedFree to read
- SEC, General solicitation — Rule 506(c) (opens in a new tab)The SEC's page on Rule 506(c) and verifying accredited statusFree to read
The full map is in US GAAP, and where these rules come from.
The words this lesson teaches
Each links to its glossary definition, which also names the authority behind it and the components that render it.
- Regulation DThe SEC's exemptions from registering a private offering — Rule 504 and Rule 506. Securities bought under it are restricted, and the issuer files Form D within 15 days of the first sale
- Rule 506(b)The private placement most startup rounds use: no limit on the amount, unlimited accredited investors and no more than 35 other purchasers in 90 days (each sophisticated, and given disclosure), and no general solicitation
- Rule 506(c)The private placement that allows general solicitation — posting the round publicly — on condition that every purchaser is accredited and the issuer takes reasonable steps to verify it
- Accredited investorA person or entity Regulation D trusts to bear a private offering's risk — among others, an individual with more than $1,000,000 of net worth excluding the primary residence, or more than $200,000 of income ($300,000 joint) in each of the last two years with the same expected; a director or executive officer of the issuer; an entity with more than $5,000,000 of assets
- Form DThe notice of an exempt offering filed with the SEC no later than 15 calendar days after the first sale under Rule 504 or 506 — a notice, not an application — and the basis of the states' notice filings
- Blue sky lawsState securities laws. For a Rule 506 offering federal law preempts state registration, but states may still require a notice filing and a fee where investors live