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. Here's what you need to know before you take on investors.
What securities law means for your business
Securities law is the body of federal and state rules that govern how businesses raise money from investors. At the federal level, the two foundational statutes are the Securities Act of 1933 and the Securities Exchange Act of 1934. Together, they require businesses to register with the SEC before offering securities to the public — unless a specific exemption applies.
A security is broader than most people expect. It 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 — regardless of how small the deal is.
Stocks, including stock options and restricted stock
Membership or ownership interests in an LLC
Convertible notes and SAFEs (Simple Agreements for Future Equity)
Bonds and other debt instruments
Crowdfunding instruments issued through SEC-registered portals
Why securities law matters when raising capital
The SEC enforces securities law through civil and administrative actions. If you sell securities without registering or qualifying for an exemption, the SEC can impose fines, bar your business from future offerings, and require you to return investor funds. Anti-fraud rules apply to every offering — registered or exempt — so misrepresenting your business to investors is a violation regardless of the deal's size.
Most founders don't realize that the anti-fraud rules under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 cover every offering — not just public ones. Omitting a material fact from your pitch deck carries the same legal risk as an outright false statement. A material fact is anything a reasonable investor would consider important when deciding whether to invest.
State securities laws — often called blue sky laws — add another layer. Even when a federal exemption covers your offering, most states require a notice filing. Rule 506 offerings under Regulation D preempt state registration requirements, but you still need to file a Form D notice with the SEC within 15 days of your first sale and comply with any state notice requirements.
How the registration and exemption system works
Full SEC registration is expensive, time-consuming, and comes with ongoing public reporting obligations. Most small businesses and startups raise capital through one of the SEC's exempt offering frameworks instead. The right exemption depends on how much you're raising, who your investors are, and whether you want to advertise the offering publicly.
Regulation D — Rule 506(b): private placements without advertising
Rule 506(b) is the most widely used exemption for startup fundraising. It allows you to raise an unlimited amount from an unlimited number of accredited investors, plus up to 35 non-accredited investors who have enough financial knowledge to evaluate the deal. You cannot advertise or publicly solicit the offering. File Form D with the SEC within 15 days of your first sale.
Regulation D — Rule 506(c): general solicitation with verified accredited investors
Rule 506(c) lets you advertise your offering publicly — on social media, at events, or through a broker — but every investor must be a verified accredited investor. No non-accredited investors are allowed under this rule. Verification requires more than a self-certification; you need documentation like tax returns, bank statements, or a letter from a licensed professional.
Regulation D — Rule 504: smaller raises open to any investor
Rule 504 allows non-reporting businesses to raise up to $10 million in a 12-month period from any investor — accredited or not — without federal registration. State securities laws still apply, so check your state's requirements before relying on this exemption. Form D is still required within 15 days of the first sale.
Regulation Crowdfunding: raising from the public through registered portals
Regulation Crowdfunding (Reg CF) lets you raise up to $5 million in a 12-month period from both accredited and non-accredited investors, but only through an SEC-registered crowdfunding portal. Individual investor limits apply based on income and net worth. You must disclose financial information, your intended use of proceeds, and material risks to the business.
Who counts as an accredited investor
The SEC defines an accredited investor 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 financial professionals also qualify. Knowing whether your investors meet this definition determines which exemption you can use and what verification steps you need to take.
FAQ
It depends. Most small businesses don't go through full SEC registration — it's expensive and triggers ongoing public reporting obligations. Instead, they qualify for an exemption under Regulation D or Regulation Crowdfunding. The right exemption depends on how much you're raising, who your investors are, and whether you plan to advertise the offering.
Under Rule 506(b), you can raise an unlimited amount from accredited investors without advertising the offering. An accredited investor is an individual with annual income above $200,000 (or $300,000 jointly with a spouse) or a net worth above $1 million excluding their primary residence. You must file Form D with the SEC within 15 days of your first sale.
The most common issues are selling securities without a valid exemption, advertising an offering under Rule 506(b) where general solicitation is prohibited, and omitting material facts from investor disclosures. Anti-fraud rules under Rule 10b-5 apply to every offering — registered or exempt. Getting it wrong can mean fines, a bar from future offerings, and having to return investor funds.
Yes, but the path depends on your business stage and how much you need. Most small businesses use private placement exemptions under Regulation D rather than listing on a public exchange. Regulation Crowdfunding is another option — it lets you raise up to $5 million from the public through an SEC-registered portal without a full public offering. Talk to a legal professional to figure out which path fits your situation.
Form D is the notice filing you submit to the SEC when you raise capital under a Regulation D exemption. You need to file it within 15 days of your first sale of securities. It's not a registration — it's a notice that tells the SEC you're relying on an exemption. Most states also require a separate notice filing under their own blue sky laws.
Securities law governs how businesses raise money from investors. The core rule is that any sale of a security — stock, membership interest, convertible note, or crowdfunding instrument — must either be registered with the SEC or qualify for an exemption. Anti-fraud rules apply to every offering regardless of size. Most small businesses use Regulation D exemptions and file Form D to stay compliant.
