The moment you take money from an investor in exchange for equity, a convertible note, a SAFE, or practically any other financial instrument, you’re selling a security. And selling securities without following federal and state law is illegal.
Not “gray area” illegal. Not “we’ll deal with it later” illegal. Actually illegal. As in, the SEC or your state regulator can come after you, your investors can rescind their investments, and your company’s cap table becomes a legal minefield.
The good news? The system gives you paths to raise money legally without going through a full-blown IPO. You just have to know which path to take.
That’s what this guide is about.
Section 5 of the Securities Act: The Starting Point
Section 5 of the Securities Act of 1933 says that every offer and every sale of securities in the United States must be registered with the SEC. Full stop.
Registration means filing a detailed prospectus, getting SEC review, and complying with ongoing reporting requirements. It’s expensive, time-consuming, and completely impractical for a startup raising a seed round.
But here’s the critical part: the law presumes every securities transaction must be registered. If you want to skip registration, the burden is on you to prove you qualify for an exemption. So when lawyers talk about “exempt offerings,” what they really mean is “offerings that are exempt from the registration requirement of Section 5.”
An offering of securities is either (a) registered, (b) exempt, or (c) illegal.
There is no “small company” exception. There is no “we’re just raising from friends and family” exception. There is no “we only raised $50,000” exception. You need an exemption. Period.
Even when you qualify for an exemption from registration, the antifraud rules still apply. You can’t lie to investors or omit material information regardless of which exemption you use. Rule 10b-5 under the Exchange Act applies to every securities transaction, exempt or not.
The Exemptions: Your Menu of Options
Each exemption has different rules about how much you can raise, who you can raise from, and how you can market your offering.
Let’s walk through the ones that actually matter.
Regulation D: The Workhorse
Regulation D is where the vast majority of private capital gets raised in America. In 2023, over $2 trillion flowed through Reg D offerings, dwarfing public markets. It comes in three flavors.
Rule 506(b): The Default
If you’re a startup raising a seed round, a Series A, or forming a fund, this is probably your exemption. Here’s what it gives you:
- No cap on how much you can raise. $500K or $500M, doesn’t matter.
- Unlimited accredited investors plus up to 35 non-accredited investors (while this is technically true, you should be cautious about including non-accredited investors).
- State law preemption. You don’t have to register your offering in each state, just file notices.
- No mandatory federal disclosure if you only sell to accredited investors. (If you include non-accredited investors, you need to provide registration-level information.)
You cannot advertise. You cannot post about your raise on Twitter. You cannot send mass emails to people you don’t know. You need pre-existing relationships with your investors.
This is why warm introductions matter so much in startup fundraising. It’s not just networking culture. It’s the law.
Cost: Legal fees for a private placement memorandum typically run $10K to $50K+, depending on complexity.
Rule 506(c): The One Where You Can Advertise
Created by the JOBS Act in 2012, Rule 506(c) lets you use general solicitation. Social media campaigns, public pitch events, online platforms, you name it.
However, every single investor must be accredited, and you must take “reasonable steps” to verify their status. No non-accredited investors allowed, no exceptions.
For years, the verification requirement kept 506(c) underused. Founders didn’t want to ask investors for tax returns or bank statements. It felt awkward and created friction in the fundraising process.
That changed in March 2025. The SEC issued a no-action letter clarifying that investor self-certification combined with a minimum investment amount can satisfy the verification requirement. This was a game-changer. It means you can now publicly market your offering and verify investors through a simple questionnaire rather than demanding their financial documents.
If you want to raise capital through an online platform or reach investors beyond your immediate network, 506(c) just became a lot more practical.
Rule 504: The Small One
Rule 504 lets you raise up to $10 million in a 12-month period (raised from $5 million in the SEC’s 2020 harmonization rulemaking). It doesn’t require investors to be accredited, and there’s no mandatory federal disclosure.
Sounds great on paper, but here’s the problem: Rule 504 has no state law preemption. That means you have to comply with securities laws in every state where you offer or sell. If you’re raising from investors in 15 states, that’s 15 sets of blue sky laws to navigate.
Rule 504 works best for small, localized raises where you plan to register under state law anyway. For most startups raising from investors across multiple states, 506(b) or 506(c) is the better call.
Regulation A+: The Mini-IPO
Regulation A+ sits between a private placement and a full IPO. It was dramatically expanded by the JOBS Act and further amended in the 2020 harmonization rulemaking (which raised the Tier 2 ceiling from $50M to $75M). It comes in two tiers.
Tier 1 lets you raise up to $20 million per year. No investor qualification requirements, but no state law preemption, which means state-by-state blue sky compliance.
Tier 2 lets you raise up to $75 million per year with state law preemption. Non-accredited investors can participate (capped at 10% of their income or net worth). Securities sold under Reg A+ are freely tradeable. No holding period, no resale restrictions.
The trade-off is cost and complexity. You must file an offering circular (Form 1-A) with the SEC via EDGAR and wait for qualification before you can sell. That process typically takes 3 to 6 months and costs $40K to $100K+ in legal and accounting fees. Tier 2 also requires audited financials and ongoing reporting obligations.
Reg A+ works best for companies raising $5M to $75M who want broad public marketing, non-accredited investor participation, and freely tradeable securities. It’s the middle ground between a Reg D private placement and a full public offering.
Regulation Crowdfunding (Reg CF)
Regulation Crowdfunding lets any company raise up to $5 million per year (raised from $1.07M in the 2020 amendments) from virtually anyone, accredited or not. It was created by Section 4(a)(6) of the Securities Act, added by the JOBS Act in 2012.
You must use an SEC-registered funding portal (platforms like Wefunder, Republic, or StartEngine). Non-accredited investors face investment limits based on their income and net worth. You need to provide disclosure documents including financial statements (reviewed for smaller raises, audited for larger ones).
Reg CF is particularly powerful for consumer-facing brands with passionate customer bases. Your customers become your investors, which creates alignment and loyalty that goes beyond the capital itself.
The trade-offs are real. Platform fees typically run 5 to 10%. There’s a one-year holding period on the securities. And you have ongoing annual reporting obligations that many companies neglect.
Cost: $5K to $30K+ in legal and accounting, plus platform fees.
Regulation S: Going International
Regulation S provides a safe harbor for selling securities outside the United States. It’s not an exemption from registration so much as the SEC saying, “If this transaction happens entirely offshore, we won’t assert jurisdiction.”
Two conditions: the transaction must be an “offshore transaction” (no offers to people in the U.S.), and there can be no “directed selling efforts” aimed at the U.S. market. Note that Reg S securities are classified as restricted securities under Rule 144 upon re-entry to the United States.
Most companies use Reg S alongside a domestic exemption like Reg D when they have genuine international investor interest. It is not a substitute for domestic compliance, and you should be cautious about relying on it without experienced counsel. (The current integration framework under Rule 152 allows concurrent Reg S and Reg D offerings without integration risk.)
Intrastate Exemptions: Keeping It Local
Rules 147 and 147A exempt offerings made entirely within a single state, pursuant to Section 3(a)(11) of the Securities Act. No dollar limit, no accredited investor requirement.
Rule 147A is more flexible than the original. The issuer doesn’t need to be incorporated in the state, just have its principal place of business there. And you can make offers to out-of-state persons, as long as all actual purchasers are in-state.
One out-of-state purchaser can blow the entire exemption. That makes these rules impractical for most companies unless you’re a truly local business raising from your community.
Accredited vs. Non-Accredited Investors
You’ve seen “accredited investor” mentioned throughout this guide. Under federal and state law, an accredited investor is someone considered financially sophisticated enough (or wealthy enough) to not need the full protections of securities registration. The full definition includes 13 categories, but the main ones for individuals:
- Net worth over $1 million, excluding your primary residence (excluded by Dodd-Frank in 2010)
- Income over $200,000 ($300,000 with a spouse) for each of the past two years, with the expectation of hitting it again
- Holders of certain professional licenses (Series 7, 65, or 82) in good standing (added in the 2020 amendments)
These dollar thresholds haven’t changed since 1982. In 1982, about 1.8% of U.S. households qualified as accredited. Today, roughly 13% qualify. Adjusted for inflation, the $1 million threshold would be about $3 million, and the $200K income threshold would be about $600K.
The accredited investor definition is far more inclusive than it was originally designed to be. While that is good for capital formation, it increasingly disconnects “accredited” from “actually sophisticated.”
Form D and Blue Sky: The Paperwork
Form D
If you’re raising under Regulation D, you must file Form D electronically on EDGAR within 15 days of the first sale of securities, per Rule 503.
Form D is a brief notice filing. It tells the SEC basic information about your company, the offering, and the exemption you’re relying on. It’s public.
Failing to file Form D doesn’t technically destroy your exemption (under Rule 507, only an injunction for non-filing triggers disqualification). But it can trigger SEC or state enforcement (as demonstrated by December 2024 settlements involving nearly $300 million in offerings), jeopardize your state law preemption under Rule 506, and disqualify you from using Reg D in the future if an injunction results.
Just file it. It’s a real hassle to get setup (getting notarized access to EDGAR, waiting for the SEC to process it, etc.), but it’s a one-time thing that you can check off your list.
Blue Sky (State) Filings
For Rule 506 offerings, federal law preempts state registration requirements under NSMIA (the National Securities Markets Improvement Act of 1996). States can still require notice filings and fees, but they can’t impose merit review or additional registration hurdles.
Budget $2K to $10K for state notice filings if you’re raising from investors across multiple states.
For Rule 504 and Reg A Tier 1 offerings, there’s no federal preemption. You’re dealing with state securities laws in every jurisdiction where you offer or sell.
Common Mistakes Founders Make
We see the same mistakes come up over and over.
1. Not realizing they’re selling securities. Convertible notes are securities. SAFEs are securities. Revenue-share agreements can be securities. If money goes in and the expectation of profit comes out, you’re probably in securities territory. (The test comes from SEC v. W.J. Howey Co., 328 U.S. 293 (1946).)
2. Accidentally blowing the general solicitation restriction. You’re doing a 506(b) offering. You post on LinkedIn about how excited you are to be raising your seed round. You may have just engaged in general solicitation and torpedoed your exemption. If you want to talk publicly about your raise, use 506(c). (Note: presentations at demo days are excluded from the definition of general solicitation under Rule 148.)
3. Skipping accredited investor verification under 506(c). The 2025 no-action letter made this easier, but you still need a process. Self-certification with a minimum investment amount works, but document it.
4. Including non-accredited investors in a 506(b) without proper disclosure. If even one non-accredited investor participates, you owe registration-level disclosure to all non-accredited purchasers. Many founders skip this entirely.
5. Not filing Form D. See above. Just do it.
6. Paying unlicensed finders. Paying someone transaction-based compensation for introducing investors likely makes them a broker-dealer under federal and state law, and they need to be registered. This is one of the most common violations and one of the easiest for regulators to spot.
7. No subscription agreements. Without proper documentation, proving you complied with your exemption becomes nearly impossible if challenged. Every investor should sign a subscription agreement and complete an investor questionnaire.
Bonus: Ignoring bad actor disqualification. Rule 506(d) disqualifies issuers if any officer, director, or 20%+ owner has certain felony convictions, SEC orders, or other disqualifying events. Check before you file.
Which Exemption Is Right for You?
A simple decision framework:
Raising from people you already know, no public marketing? Rule 506(b). This is the default for most startup raises and fund formations.
Want to market publicly or raise through an online platform? Rule 506(c) if you can limit to accredited investors (which is now much easier post-2025). Reg CF if you want non-accredited investors and are raising under $5M.
Raising $5M+ and want non-accredited investors with freely tradeable securities? Reg A+ Tier 2. Be prepared for the cost and timeline.
Building a community of customer-investors? Reg CF. The platform requirement adds cost, but the community-building benefits can be substantial.
Truly local raise from your community? Rule 147A if everyone is in-state.
International investors? Reg S for the offshore piece, likely combined with Reg D domestically.
Most companies end up using Rule 506(b) or 506(c). That’s not because the other exemptions are bad. It’s because 506 offers unlimited raise amounts, state law preemption, and relatively straightforward compliance. Start there, and only look elsewhere if your specific situation calls for it.
Get This Right From the Start
Getting this wrong early creates problems that compound. A botched exemption doesn’t just mean regulatory risk today. It means every future round of funding comes with a disclosure about prior noncompliance, every potential acquirer’s lawyers flag it in diligence, and every investor who participated has a potential rescission claim hanging over your cap table.
The rules aren’t designed to stop you from raising money. They’re designed to make sure investors get a fair deal. Work within them, and you’ll build your company on a foundation that holds up when it matters most.
If you’re raising capital, or thinking about it, get the securities side right. It’s one of the highest-leverage legal decisions you’ll make as a founder.