# 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.

Source: https://lopifi.com/learn/securities-law-for-startup-fundraising
Part of: Lopifi — US GAAP books on autopilot, checked by a CPA (https://lopifi.com)

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**What securities laws apply when a startup raises money — Reg D, 506(b), 506(c), accredited investors?** 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](https://lopifi.com/md/glossary/regulation-d) for investors, [Regulation Crowdfunding](https://lopifi.com/md/glossary/regulation-crowdfunding) for the public, [Rule 701](https://lopifi.com/md/glossary/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.**

> “cannot be resold without registration under the Act or an exemption therefrom.”

— [17 CFR §230.502(d)](https://www.law.cornell.edu/cfr/text/17/230.502), Securities bought in a Reg D offering are restricted

**Rule 506(b)**
- Pro: No limit on the amount
- Pro: Unlimited accredited investors
- Pro: No verification step like Rule 506(c)'s
- Con: No general solicitation or advertising
- Con: Non-accredited purchasers (at most 35 in 90 days) need disclosure and sophistication
- Best for: Most SAFE and priced rounds

**Rule 506(c)**
- Pro: General solicitation and advertising allowed
- Pro: No limit on the amount
- Con: Every purchaser must be accredited
- Con: Reasonable steps to verify each one
- Best for: A round announced in public — a demo day post, a website

**Regulation Crowdfunding**
- Pro: Open to non-accredited investors
- Con: $5 million in 12 months
- Con: An intermediary and ongoing disclosure
- Best for: Raising from customers and the public

The three exemptions a founder meets

> “no more than, or the issuer reasonably believes that there are no more than, 35 purchasers of securities from the issuer”

— [17 CFR §230.506(b)(2)(i)](https://www.law.cornell.edu/cfr/text/17/230.506), Rule 506(b): unlimited accredited investors, at most 35 others, no general solicitation

> “All purchasers of securities sold in any offering under paragraph (c) of this section are accredited investors.”

— [17 CFR §230.506(c)(2)(i)–(ii)](https://www.law.cornell.edu/cfr/text/17/230.506), Rule 506(c): advertise openly, sell only to verified accredited investors

> “by any form of general solicitation or general advertising”

— [17 CFR §230.502(c)](https://www.law.cornell.edu/cfr/text/17/230.502), No general solicitation, except under Rule 506(c)

| Test | Threshold |
| --- | --- |
| Net worth | More than $1,000,000, alone or with a spouse or spousal equivalent, excluding the primary residence |
| Income | More than $200,000 ($300,000 joint) in each of the last two years, expecting the same this year |
| Insider | A director, executive officer or general partner of the issuer |
| Entity | Certain entities with more than $5,000,000 of assets or investments, not formed to make this investment |

Who is an accredited investor — the tests founders meet most, 17 CFR §230.501(a).

> “individual net worth, or joint net worth with that person's spouse or spousal equivalent, exceeds $1,000,000”

— [17 CFR §230.501(a)(5)](https://www.law.cornell.edu/cfr/text/17/230.501), Accredited investor: the net worth test, primary residence excluded

> “an individual income in excess of $200,000 in each of the two most recent years”

— [17 CFR §230.501(a)(6)](https://www.law.cornell.edu/cfr/text/17/230.501), Accredited investor: the income test, $200,000 alone or $300,000 joint

**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.

> “Any accredited investor.”

— [17 CFR §230.501(e)(1)(iv)](https://www.law.cornell.edu/cfr/text/17/230.501), Accredited investors are left out of Rule 506(b)'s count of 35

*[Figure: us states map]*

Illustrative: a Rule 506 offering registers with no state, but each investor's state may ask for a notice filing and a fee.

In this lesson: Form D and state notice filings, Regulation Crowdfunding, and Rule 701 for employee equity.

## Pages in this lesson

- [Form D and state notice filings](https://lopifi.com/md/learn/securities-law-for-startup-fundraising/form-d-and-blue-sky-filings) — 4 min. When is Form D due, and what are blue sky filings?
- [Regulation Crowdfunding](https://lopifi.com/md/learn/securities-law-for-startup-fundraising/regulation-crowdfunding) — 4 min. What is Regulation Crowdfunding and how much can a startup raise?
- [Rule 701 for employee equity](https://lopifi.com/md/learn/securities-law-for-startup-fundraising/rule-701-employee-equity) — 3 min. What is Rule 701 and do I need it to grant stock options?

## Where this lesson's rules come from

- [17 CFR §230.506(b)(2)(i)](https://www.law.cornell.edu/cfr/text/17/230.506) — Rule 506(b): unlimited accredited investors, at most 35 others, no general solicitation (sec)
- [17 CFR §230.506(c)(2)(i)–(ii)](https://www.law.cornell.edu/cfr/text/17/230.506) — Rule 506(c): advertise openly, sell only to verified accredited investors (sec)
- [17 CFR §230.501(a)(5)](https://www.law.cornell.edu/cfr/text/17/230.501) — Accredited investor: the net worth test, primary residence excluded (sec)
- [17 CFR §230.501(a)(6)](https://www.law.cornell.edu/cfr/text/17/230.501) — Accredited investor: the income test, $200,000 alone or $300,000 joint (sec)
- [17 CFR §230.502(c)](https://www.law.cornell.edu/cfr/text/17/230.502) — No general solicitation, except under Rule 506(c) (sec)
- [17 CFR §230.502(d)](https://www.law.cornell.edu/cfr/text/17/230.502) — Securities bought in a Reg D offering are restricted (sec)
- [SEC, General solicitation — Rule 506(c)](https://www.sec.gov/resources-small-businesses/exempt-offerings/general-solicitation-rule-506c) — The SEC's page on Rule 506(c) and verifying accredited status (sec)

## Read further

- https://lopifi.com/md/startups/startup-compliance-calendar

- **Track:** [Cap tables & raising](https://lopifi.com/md/learn/equity)
- **Lesson:** Lesson 7 of 10 — 9 min
- **Terms taught:** [Regulation D](https://lopifi.com/md/glossary/regulation-d), [Rule 506(b)](https://lopifi.com/md/glossary/rule-506-b), [Rule 506(c)](https://lopifi.com/md/glossary/rule-506-c), [Accredited investor](https://lopifi.com/md/glossary/accredited-investor), [Form D](https://lopifi.com/md/glossary/form-d), [Blue sky laws](https://lopifi.com/md/glossary/blue-sky-laws)
- **Previous:** [RSUs, Cap table · Lesson 6](https://lopifi.com/md/learn/employee-stock-options-iso-vs-nso/rsus-at-later-stage)
- **Next:** [Form D and state notice filings](https://lopifi.com/md/learn/securities-law-for-startup-fundraising/form-d-and-blue-sky-filings)
- **The course:** https://lopifi.com/md/learn