US securities law for founders

Every time a startup takes money in exchange for a stake or a promise of one, it is selling a security. The Securities Act of 1933 says a company may offer or sell securities only if the offering is registered with the SEC or fits an exemption. Startups do not register. They rely on exemptions, almost always Regulation D or Regulation Crowdfunding. This page explains how those exemptions work, what they require from founders, and where early raises most often go wrong.

Why a SAFE or note is a securities offering

US securities law defines "security" broadly. The SEC's guide to common startup securities lists stock, LLC membership interests, options, convertible notes and SAFEs among the instruments issued to startup investors. A SAFE gives the holder no shares today, only a contractual right to equity when a future financing or sale happens. It is still a security, and selling one is an offering that needs an exemption, exactly like selling preferred stock in a priced round or issuing a convertible note.

Two consequences follow. First, the exemption's conditions apply to the whole raise: the SEC warns that offering securities to even one person who does not meet the conditions of the private-placement exemption can put the entire offering in violation. Second, the anti-fraud rules apply to exempt offerings too. Anything you tell investors, including your pitch deck and your answers in meetings, must not be materially misleading.

Regulation D: Rule 506(b) and Rule 506(c)

Rule 506 of Regulation D is the exemption most startup rounds use. It has two versions that differ mainly on whether you may advertise.

Rule 506(b) in practice

Founders who use 506(b) usually sell only to accredited investors, because including even one non-accredited investor triggers the disclosure requirements: the SEC says such investors must receive disclosure documents generally comparable to those in a Regulation A offering, plus financial statement information specified in the rule, and the company should be available to answer their questions. Preparing those materials is expensive for an early company, so check the status of friends and family before accepting their money.

The ban on general solicitation is the rule founders break most easily. The SEC treats as an offer any communication that "conditions the market" or arouses public interest in a securities offering. Its examples of general solicitation include newspaper and magazine advertisements, unrestricted public websites, broadcasts and seminars. A public post saying "we are raising a seed round, DM me to invest" can be enough. Two safer channels:

• Pre-existing, substantive relationships. Contacting people with whom the company, or a registered broker-dealer or investment adviser acting for it, already had a relationship before the offering, and enough information to evaluate their accredited status.
• Qualifying demo days. Pitches at events sponsored by a college or university, a state or local government, a nonprofit, an angel group, an incubator or an accelerator are not general solicitation if the sponsor's role is limited, the event advertising does not mention a specific offering, and what you say about the offering is limited to the fact that you are raising, the type and amount of securities, the intended use of proceeds and the amount still available.

Rule 506(c) in practice

Under 506(c) you may advertise openly, but every purchaser must be accredited and you must take reasonable steps to verify it; a tick-box representation alone is not enough. The rule lists non-exclusive methods for individuals that are deemed reasonable:

• reviewing IRS forms reporting income for the two most recent years, plus a written representation about the current year;
• reviewing statements of assets dated within the prior three months and a consumer credit report for liabilities, plus a written representation that all liabilities are disclosed;
• obtaining written confirmation, dated within the prior three months, from a registered broker-dealer, an SEC-registered investment adviser, a licensed attorney or a certified public accountant.

In March 2025, SEC staff in the Division of Corporation Finance agreed that a high minimum investment amount is a relevant factor in verification. In the request they responded to, the minimums were $200,000 for individuals and $1,000,000 for entities, combined with written representations that the investor is accredited and that the investment is not financed by a third party for that purpose. This is a staff view with no legal force, not a rule; whether it fits your raise is a question for your lawyer.

Who is an accredited investor

The definition is in Rule 501(a). The main categories for accredited investors are:

Form D and state notice filings

A company relying on Rule 504 or 506 must file a notice on Form D with the SEC within 15 calendar days after the first sale. The SEC treats the date of first sale as the date the first investor is irrevocably contractually committed to invest, which in a SAFE round is typically when the first investor signs, not when the round closes. If the deadline falls on a weekend or holiday, it moves to the next business day. There is no SEC fee.

Form D is filed online through EDGAR, and a company that has never filed needs EDGAR access first, through a Form ID application and individual Login.gov credentials for the person filing. Start that process before the round closes, not on day 14.

Blue sky filings. For Rule 506 offerings, federal law preempts state registration, but each state may still require a notice filing and fee, usually tied to where your investors live. Rule 504 offerings get no such preemption and must comply with state securities laws in each state where securities are offered or sold. Ask your lawyer to handle state notices alongside Form D.

Other exemptions: crowdfunding and Rule 504

Regulation Crowdfunding

Regulation Crowdfunding lets a company sell securities to the public, including non-accredited investors, online. Its main conditions, from the SEC and 17 CFR 227.100:

• The company may raise no more than $5,000,000 in total through crowdfunding offerings in any 12-month period.
• All transactions must take place online through one SEC-registered intermediary: a broker-dealer or a registered funding portal. Sales go through the intermediary's platform, not directly through the company.
• Non-accredited investors are limited across all crowdfunding offerings in 12 months: if either their annual income or net worth is below $124,000, to the greater of $2,500 or 5% of the greater of the two; if both are at least $124,000, to 10% of the greater of the two, capped at $124,000.
• The company must file disclosure on Form C and provide it to investors and the intermediary, and afterwards file and post an annual report with financial statements.
• Securities bought generally cannot be resold for one year, and bad-actor disqualification applies.

Crowdfunding can suit a consumer company with a large community, but it adds many small holders to your cap table. The SEC has published an investor bulletin cautioning investors about SAFEs in crowdfunding.

Rule 504

Rule 504 allows offerings of up to $10 million in any 12-month period, with Form D due within 15 days of the first sale. It is not available to SEC reporting companies, investment companies, "blank check" companies or companies subject to its own bad-actor disqualification. Because Rule 504 does not preempt state law, the company must register or qualify for an exemption in every state where it sells, which is why most venture rounds use Rule 506 instead.

Bad-actor disqualification

Rule 506 is unavailable if the company or a "covered person" has a disqualifying event. Covered persons include the company and its predecessors and affiliated issuers; directors, executive officers and other officers taking part in the offering; owners of 20% or more of voting equity; promoters; and anyone paid to solicit investors, with their directors and officers. Disqualifying events include certain securities-related criminal convictions (within ten years, or five for the company itself), court injunctions within five years, certain final orders of state and federal regulators, SEC disciplinary and cease-and-desist orders, and suspension from a self-regulatory organization such as FINRA. Events before 23 September 2013 do not disqualify but must be disclosed to investors.

Run a short written questionnaire for every director, officer, large holder and paid placement agent before each round. There is an exception if the company did not know and, with reasonable care, could not have known about a disqualification, but only if it actually took that care.

Finders and unregistered brokers

Founders are often offered help raising money in exchange for a percentage of what is raised. The SEC's guidance is that a person who finds investors for a company or a funding round, takes part in solicitation or negotiation, or is paid based on the outcome or size of the transaction is likely acting as a broker and generally must be registered with the SEC and be a member of FINRA. A company's own officers and employees can usually sell its securities without registering, under conditions, but not if they are paid commissions for it or routinely sell securities.

Paying an unregistered finder a success fee is a common early mistake. The SEC lists the consequences as possible civil or criminal action, rescission, meaning investors may be entitled to their money back with interest, and difficulty raising later, because new investors will ask for representations about past compliance. You can check registration on Investor.gov or FINRA BrokerCheck.

A founder's checklist

• Choose the exemption before you talk to investors, and keep your outreach consistent with it. If you will post publicly about the raise, plan for 506(c) and verification.
• Collect accredited-investor representations, or verification under 506(c), from every investor before they sign.
• Diary the Form D deadline from the first signed investment, and get EDGAR access early.
• Have counsel handle state notice filings.
• Run bad-actor questionnaires for covered persons before each round.
• Pay no transaction-based fees to anyone who is not a registered broker-dealer.
• Keep the evidence (subscription documents, representations, Form D and state filings) in your data room; the next round's lawyers will ask for it during due diligence.

Sources

1. Common Startup Securities, U.S. Securities and Exchange Commission. Public domain (U.S. federal government work).
2. Private Placements - Rule 506(b), U.S. Securities and Exchange Commission. Public domain (U.S. federal government work).
3. General solicitation - Rule 506(c), U.S. Securities and Exchange Commission. Public domain (U.S. federal government work).
4. General Solicitation (building block), U.S. Securities and Exchange Commission. Public domain (U.S. federal government work).
5. Accredited Investors (building block), U.S. Securities and Exchange Commission. Public domain (U.S. federal government work).
6. No-Action Letter: Latham & Watkins (Rule 506(c) verification), 12 March 2025, U.S. Securities and Exchange Commission, Division of Corporation Finance. Public domain (U.S. federal government work).
7. Filing a Form D Notice, U.S. Securities and Exchange Commission. Public domain (U.S. federal government work).
8. Regulation Crowdfunding, U.S. Securities and Exchange Commission. Public domain (U.S. federal government work).
9. Exemption for limited offerings not exceeding $10 million: Rule 504 of Regulation D, U.S. Securities and Exchange Commission. Public domain (U.S. federal government work).
10. Disqualification of Felons and Other "Bad Actors" from Rule 506 Offerings: Small Entity Compliance Guide, U.S. Securities and Exchange Commission. Public domain (U.S. federal government work).
11. Broker-Dealers (building block), U.S. Securities and Exchange Commission. Public domain (U.S. federal government work).
12. Consequences of Noncompliance (building block), U.S. Securities and Exchange Commission. Public domain (U.S. federal government work).
13. 17 CFR 230.501, 230.503, 230.504 and 230.506 (Regulation D), Electronic Code of Federal Regulations (eCFR). Public domain (U.S. federal government work).
14. 17 CFR 227.100 and 227.202 (Regulation Crowdfunding), Electronic Code of Federal Regulations (eCFR). Public domain (U.S. federal government work).