Every share of stock, option, SAFE, and convertible note a company issues is a security, and every sale needs either SEC registration or an exemption. For nearly all private companies that means an exempt offering, and the exemption has to be chosen and documented before money changes hands. Most of the time the rules are manageable. The trouble comes from casual fundraising: a pitch posted publicly before a 506(b) round, an unaccredited friend on the cap table, a missed Form D, a finder paid on commission. We structure raises so they hold up in the next round's diligence and in any dispute with an unhappy investor.
Section 4(a)(2) And Regulation D
Section 4(a)(2) of the Securities Act exempts transactions not involving a public offering, and Regulation D supplies safe harbors with predictable conditions. Rule 506(b) allows unlimited raises from accredited investors plus up to 35 sophisticated non-accredited purchasers, who must receive prescribed disclosure, with no general solicitation. Rule 506(c) permits general solicitation if every purchaser is accredited and the issuer takes reasonable steps to verify that status. Rule 504 allows up to $10 million in 12 months but does not preempt state registration. Accredited investors include individuals with $200,000 in income, or $300,000 with a spouse or partner, $1 million in net worth excluding a primary residence, or certain securities licenses, and many entities with $5 million in assets.
SAFEs, Notes, And Crowdfunding
SAFEs and convertible notes are securities, so they need an exemption like any other issuance, usually Rule 506(b). Their terms carry their own risks: valuation caps and discounts that stack across multiple instruments, most-favored-nation clauses, pro rata rights, and conversion mechanics that can surprise founders at the priced round. We model the conversion before you sign. For companies that want to raise from their community, Regulation Crowdfunding allows up to $5 million in 12 months from the general public through a registered funding portal or broker-dealer, with Form C disclosure, investment limits for non-accredited investors, and annual reports afterward. Rule 206 of Regulation Crowdfunding allows testing the waters before filing.
Filings, Bad Actors, And Blue Sky
Form D is due within 15 calendar days after the first sale in a Regulation D offering. Securities sold under Rule 506 are covered securities under the National Securities Markets Improvement Act, so states cannot require registration, but most require a notice filing and fee, typically through NASAA's Electronic Filing Depository. Rule 504 offerings and Section 4(a)(2) offerings outside Regulation D get no preemption, so state exemptions must be checked. Rule 506(d) disqualifies an offering if the issuer or a covered person, such as a director, executive officer, 20 percent owner, or paid solicitor, has certain securities-related convictions, orders, or bars. We run the bad-actor questionnaires, prepare the filings, and calendar the deadlines.
Investor Disputes And Rescission
When a company struggles, investors look for someone to blame, and an offering that did not fit an exemption hands them a remedy. Section 12(a)(1) of the Securities Act gives purchasers in an unregistered, non-exempt offering the right to rescind and recover what they paid, generally within one year of the violation. Rule 10b-5 and state securities laws reach misstatements in pitch decks and investor updates, and many state statutes make officers and directors personally liable. We defend issuers and their management against these claims, assess whether the exemption can be supported on the existing record, and use rescission offers where they reduce exposure. We also represent investors who were misled.
Resales And Common Mistakes
Securities bought in a private placement are restricted. Under Rule 144, holders of a reporting company's stock generally must wait six months before reselling, and holders of a non-reporting company's stock one year, with added conditions for affiliates. Secondary sales before an IPO usually rely on Section 4(a)(7) or established private resale practice under Section 4(a)(1), subject to the company's transfer restrictions and rights of first refusal. The mistakes we see most: general solicitation in a 506(b) round through public posts or press about the raise, skipping accredited verification in a 506(c) round, missing Form D and state notice filings, issuing equity without board approval, paying unregistered finders, and stacking SAFEs without modeling dilution.
