Raising capital is an exciting milestone for any startup but it also comes with legal obligations. SEC compliance for startups isnât optional, especially when issuing equity, convertible notes, or SAFE agreements. Understanding SEC regulations for fundraising ensures your venture capital raise stays on track and avoids costly penalties.
At Faison Law Group, we guide founders through the essential elements of startup SEC compliance, including exemptions under Regulation D, filing requirements, and investor qualifications.
Do Startups Need Securities Compliance?
Absolutely. The Securities and Exchange Commission (SEC) regulates the offer and sale of securities, which includes equity, convertible notes, SAFEs and investment contracts, at the federal level. However, the states also regulate the offer and sale of securities, through state specific âblue sky lawsâ.
Penalties for Non-compliance
The SEC can impose a number of crippling penalties for failure to comply with securities regulations, including:
Civil Penalties such as fines and lawsuits (see HERE)
Recission, meaning that the company has to return any investorâs money PLUS interest
Bad Actor Disqualification, meaning that the company, and any âcovered personsâ such as executives, directors, officers, and investors of 20% or greater, are prohibited from relying on any SEC exemptions in the future. That can be a death sentence for future fundraising.
The states, usually through their Office of the Attorney General, also get a bite at the apple and can impose fine and civil penalties as well!
Bottom line: Ignoring SEC requirements could derail your funding before it even begins.
Regulation D
Most securities lawyers advise startups to rely on Regulation D exemptions to raise capital without registering their offering with the SEC. These exempt offerings allow companies to raise funds while avoiding the time-consuming and EXPENSIVE registration process. Regulation D offers three exemptions that startups can use:
504: Allows companies to raise up to $10 million dollars in a 12mo period from an unlimited number of accredited and unaccredited investors. The catch is that it does not pre-empt state law. That means that the company must comply with the state âblue sky lawsâ of each state where its investors are located, and, in most cases where the company is formed. Because of that, in all but the most narrow of cases, it is useless!
506(b): In my opinion, the most popular of the exemptions. Allows companies to raise an unlimited amount of money in a 12-month period. It preempts state law. It can be used by both accredited and unaccredited investors, HOWEVER, companies cannot advertise of solicit the offering. All investors must have sufficient sophistication to evaluation the deal, which in actuality means just putting a representation in the documents. The key question for the company is if it wants to raise money from unaccredited investors.
Accredited Investors: is basically SEC shorthand for rich people. As a policy, the SEC takes the position that the more financial resources that you have, the more sophisticated you are, or at least, you donât need as many disclosures from the company.
There are a lot of nuanced definitions of accredited investor that you can find HERE, but basically, (i) if you are single and make at least $200k in the previous two years, (ii) are married and jointly make at least $300k in the previous two years, or (iii) are worth at least $1MM excluding your primary residence.
If you are not an accredited investor, you can still use 506(b), but itâs limited to 35 unaccredited investors AND you must make robust disclosures, AND provide financial statements AND be available to answer questions. In the real world, this means a PPM. All these requirements apply if you have 1 unaccredited or 35. Moreover, if you have 1 you have to give the same information to all the investors, accredited and unaccredited. This is the main reason that lawyers push to have clients only raise money from accredited investors.
506(c): Can raise an unlimited amount of money in a 12-month period. It preempts state law. Also allows companies to advertise and solicit their offering. However, it is restricted to accredited investors only. Companies must either take steps to verify the accreditation status of their investors, such as tax returns, bank statements, letters from CPAs and attorneys, OR as of March 2025, if the investor is a person, invest at least $200k and if the investor is an entity, invest at least $1 million (plus some additional steps).
Blue Sky Laws
If a Company is offering securities domestically, it will have to satisfy both state and federal securities laws. Some states, typically the most âliberalâ have securities laws that are just as, or even more restrictive than the federal securities laws. Moreover, companies have to satisfy not just the blue sky laws of one state, but EVERY state where an investor is located. That is more often a deal killer. 506(b) and (c) preempt state laws BUT companies still must register the offering with the state. In my opinion, this is primarily a way for the states to get money, as they charge a fee. In some states the fee may be as low as $50, but in others such as Delaware, the fee may be $1,000. Oh, by the way, the states also charge late fees if the filings arenât done within 15 days of the offering! Even if you are using Rule 506, you still need to file with the states.
Key Steps if Using Rule 506 of Regulation D:
Create a CIK through the SEC
⢠File Form D with the SEC
⢠Create account with National Association of Securities Administrators Association (NASAA)
⢠File Form D Notice with each state where investors are located
Key Compliance Tips
Convertible notes, SAFEs, stocks, units, partnership interests and membership interests are all securities
⢠Decide whether you are going to offer your securities to unaccredited investors
⢠Decide whether you are going to promote and publicly solicit investors for the offering
⢠Comply with either 506(b) or 506(c)
⢠File your Form D with the SEC
⢠File your notice filing with each state where your investors are located through the NASAA
Final Thoughts: Stay Compliant While Growing Your Startup
Raising capital doesnât have to mean running afoul of the law. By understanding SEC compliance for startups, you protect your business, your investors, and your long-term vision.
From choosing the right exempt offering to ensuring proper investor accreditation, every detail matters.
Need Help With SEC Compliance for Your Fundraise?
Navigating SEC regulations for fundraising doesnât have to be overwhelming. At Faison Law Group, we specialize in guiding founders through the legal complexities of venture capital compliance. Whether youâre preparing for your first round or scaling across multiple jurisdictions, our team ensures your offering is structured for success and fully compliant.
Contact us today to schedule a consultation and get expert legal support for your fundraising journey.
The information provided herein is for general informational purposes only and does not constitute legal advice, nor does it create an attorney-client relationship. You should consult a qualified attorney for advice regarding your specific legal situation or compliance obligations.