Raising Capital Legally: What You Need to Know About Securities Law
Raising funds for your business? Learn the key securities law requirements — registration, exemptions, investor rules, and anti-fraud obligations — before you take on investors.
Bizee Editorial Staff
Editorial Team
Introduction
When you raise capital by selling securities, federal law requires you to either register the offering with the SEC or qualify for an exemption. Most small businesses use an exemption — but the rules around who can invest, how much you can raise, and what you must disclose still apply regardless of which path you take.
What securities law means for your business
Securities law is the body of federal and state rules that governs how businesses raise money by selling ownership interests, debt instruments, or other investment contracts to outside investors. The two foundational federal laws are the Securities Act of 1933 — which covers the initial sale of securities — and the Securities Exchange Act of 1934, which governs ongoing trading and reporting. Together, they form the core of what the SEC enforces.
A security includes stocks, bonds, membership interests in an LLC, convertible notes, and certain crowdfunding instruments. If you're offering any of these to investors in exchange for money, securities law applies to your transaction — whether your business is a startup raising its first round or an established LLC bringing on a new partner.
Most founders don't realize how broad the definition of a security is until they're already mid-raise. Getting clarity on this early saves a lot of unwinding later.
Why securities law matters when raising capital
Anti-fraud rules apply to every securities offering — registered or exempt. Under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, it's unlawful to make any false statement of a material fact or to leave out information that would make your statements misleading to a reasonable investor. This applies even in private deals with friends and family.
If the SEC determines you sold securities without proper registration or a valid exemption, it can pursue civil or administrative action — including fines, disgorgement of funds raised, and a bar on future offerings. Getting it wrong doesn't just cost money; it can shut down your ability to raise capital at all.
Plus, state securities laws — often called blue sky laws — add another layer. Even if your offering qualifies for a federal exemption under Regulation D, you may still need to file notice with individual states where your investors are located.
How registration and exemptions work
Under the Securities Act of 1933, every offering of securities must be registered with the SEC unless it qualifies for an exemption. Full registration is expensive, time-consuming, and comes with ongoing public reporting obligations — it's the path for companies planning an IPO, not most small businesses. Exemptions are how the vast majority of private capital raises happen legally.
Regulation D is the most commonly used exemption framework. It has 3 main rules. Rule 504 lets non-reporting companies raise up to $10 million in a 12-month period from any investor, subject to state securities laws. Rule 506(b) allows unlimited raises from accredited investors and up to 35 non-accredited but sophisticated investors, with no general solicitation permitted. Rule 506(c) allows general solicitation and advertising, but every investor must be verified as accredited.
For any Regulation D offering, you need to file Form D with the SEC no later than 15 days after the first sale of securities. This is a notice filing, not an approval — but skipping it puts your exemption at risk.
An accredited investor is defined by the SEC as an individual with income exceeding $200,000 per year (or $300,000 jointly with a spouse) in each of the prior 2 years, or a net worth exceeding $1 million excluding their primary residence. Certain licensed professionals also qualify. Who you can sell to — and how many non-accredited investors you can include — depends on which exemption you're using.
Regulation Crowdfunding (Reg CF) is a separate path that lets businesses raise up to $5 million in a 12-month period from both accredited and non-accredited investors through SEC-registered portals. It allows public solicitation but comes with its own disclosure and reporting requirements.
Talk to a securities attorney before you structure your raise. The right exemption depends on how much you're raising, who your investors are, and whether you plan to advertise the offering — and getting the structure wrong before the first dollar comes in is much harder to fix than getting it right from the start.
FAQ
It depends. Most small businesses don't register — they use an exemption instead. Under the Securities Act of 1933, every offering of securities must be registered with the SEC unless it qualifies for an exemption. Regulation D is the most common exemption framework for private raises. If you qualify, you file Form D with the SEC within 15 days of your first sale rather than going through full registration.
An accredited investor is an individual with annual income above $200,000 (or $300,000 jointly with a spouse) for the prior 2 years, or a net worth above $1 million excluding their primary residence. It matters because most Regulation D exemptions limit how many non-accredited investors you can include — or ban them entirely. Under Rule 506(c), every investor must be verified as accredited before you can advertise your offering publicly.
It depends on which exemption you're using. Under Rule 506(b), general solicitation — advertising, social media posts, public pitches — is prohibited. Under Rule 506(c), you can advertise publicly, but every investor who participates must be verified as accredited. Regulation Crowdfunding also allows public solicitation, but only through SEC-registered funding portals and subject to investor limits based on income or net worth.
The most common mistakes are selling securities without a valid exemption, using general solicitation under Rule 506(b) where it's not allowed, not filing Form D within 15 days of the first sale, and making misleading statements to investors. Anti-fraud rules under Rule 10b-5 apply to every offering — registered or exempt. Leaving out a material fact that a reasonable investor would want to know carries the same legal exposure as an outright false statement.
It depends on the exemption. Rule 504 under Regulation D allows raises up to $10 million in a 12-month period. Rule 506(b) and Rule 506(c) have no dollar cap — you can raise unlimited amounts from accredited investors. Regulation Crowdfunding caps raises at $5 million in a 12-month period. Each path has different investor eligibility rules, disclosure requirements, and restrictions on how you can market the offering.
Yes. Rule 506 offerings under Regulation D preempt state registration requirements, but you still need to file notice with each state where investors are located — these are called blue sky filings. States can also enforce their own anti-fraud rules regardless of federal exemption status. If you're raising from investors in multiple states, check each state's notice filing requirements before you close your first investor.