Equity, tax and compliance
Securities Law for Startup Fundraising: Reg D 506(b) and 506(c), Form D, Reg S and Rule 701
The short answer
Every SAFE, note or share sale is a securities offering that must be registered with the SEC or fit an exemption. Most startups use Regulation D Rule 506(b) (accredited investors, no general solicitation) or Rule 506(c) (general solicitation allowed, but every purchaser must be accredited and verified), file Form D within 15 days of the first sale, and make state notice filings. Investors outside the United States can be offered securities under Regulation S, and employee and advisor equity typically relies on Rule 701. Selling to non-accredited friends and family, paying unregistered finders or publicizing a 506(b) round are the most common mistakes.
Key numbers
| Rule | Threshold or requirement | Source |
|---|---|---|
| Accredited individual: income | Over $200,000 (or $300,000 with spouse or spousal equivalent) in each of the last 2 years, expected again | SEC Rule 501(a) |
| Accredited individual: net worth | Over $1,000,000, excluding primary residence | SEC Rule 501(a) |
| Accredited by credential | Series 7, 65 or 82 license holders in good standing | SEC 2020 amendments |
| Rule 506(b) non-accredited limit | Up to 35 sophisticated purchasers (with disclosure obligations) | SEC Rule 506(b) |
| Form D deadline | 15 calendar days after the first sale | SEC Rule 503 |
| Rule 506(c) verification by minimum investment | $200,000 for individuals, $1,000,000 for entities, plus written representations | SEC staff no-action letter, March 2025 |
| Rule 701 annual limit | Greater of $1M, 15% of total assets or 15% of the class; extra disclosure above $10M in 12 months | SEC Rule 701 |
| Regulation Crowdfunding cap | $5M per 12 months | SEC Regulation CF |
| Integration safe harbor | Offerings more than 30 days apart generally not integrated | SEC Rule 152 (2021) |
Why this matters
If a startup sells securities without an exemption, investors may have a right of rescission (to demand their money back) for years, the company may face regulatory action, and future investors will discover the issue in diligence. Securities compliance is cheap when done at the time of the raise and expensive to fix later.
Rule 506(b): the default private round
- Who can invest: unlimited accredited investors and up to 35 non-accredited investors who are financially sophisticated. If any non-accredited investor participates, the company must provide disclosure similar to a registered offering, including financial statements. In practice, most startups admit accredited investors only.
- No general solicitation: you may not advertise the offering publicly (social posts announcing the raise with terms, public demo-day pitches with investment terms, mass emails to strangers). You may approach people with whom you have a pre-existing, substantive relationship, including through introductions by trusted contacts.
- Verification: investors can self-certify accredited status in a questionnaire.
Rule 506(c): when you want to talk publicly
- General solicitation allowed: you can announce the raise and its terms publicly.
- All purchasers must be accredited, and the company must take reasonable steps to verify status: reviewing tax returns or bank and brokerage statements, or obtaining a letter from a CPA, lawyer or broker-dealer.
- 2025 development: in March 2025 the SEC staff issued a no-action letter indicating that requiring a high minimum investment ($200,000 for individuals and $1,000,000 for entities), together with written representations that the investor is accredited and that the investment is not financed by a third party, can be a reasonable verification step, absent contrary facts.
Form D and state filings
- File Form D electronically with the SEC (through EDGAR, which requires access codes for the company) within 15 days after the first sale, which is generally when the first investor becomes irrevocably committed (for a SAFE, usually signature and funding).
- File state notice filings and pay fees in each state where investors reside, most through the NASAA electronic filing system. Rule 506 securities are "covered securities", so states cannot require registration, only notices and fees.
- Amend Form D annually if the offering continues for more than a year, or for material changes.
Regulation S: investors outside the United States
Regulation S exempts offers and sales made in "offshore transactions" with no "directed selling efforts" in the United States. For a US startup that is not an SEC-reporting company, equity securities (including SAFEs) fall in Category 3, which generally requires:
- The investor certifies it is not a US person and is not acquiring for a US person.
- A one-year distribution compliance period during which the securities cannot be sold to US persons.
- Legends on the securities and agreement by the investor to resell only under Regulation S, registration or an exemption.
- The company refuses to register transfers that do not comply.
A single round can combine Rule 506(b) or (c) for US investors and Regulation S for non-US investors. Also check the investor's home country rules: for example, offering securities to the public in Mexico has its own regime, while private offers to a few sophisticated investors are generally treated differently. See non-US founders.
Rule 701: equity for employees, advisors and consultants
Grants of options and restricted stock to employees, directors, consultants and advisors (natural persons providing bona fide services not related to capital raising) can rely on Rule 701. In any 12 months, the company may sell up to the greater of $1,000,000, 15% of total assets or 15% of the outstanding class. If grants exceed $10,000,000 in a 12-month period, the company must deliver additional disclosure, including financial statements and risk factors. State rules also apply (California has its own exemption requirements).
Other exemptions
- Rule 504: up to $10M in 12 months, but no state preemption.
- Regulation Crowdfunding: up to $5M in 12 months through a registered portal, with investor limits for non-accredited investors and ongoing reporting.
- Regulation A Tier 2: up to $75M with an SEC-qualified offering statement; rarely used by venture-backed startups.
Worked example: a mixed SAFE round
Acme raises $1,200,000 on post-money SAFEs from: - 6 US angels (accredited, introduced through the founders' network): $600,000 - 1 US seed fund: $400,000 - 2 investors resident in Mexico: $200,000
Plan. US investors under Rule 506(b) with accredited investor questionnaires. Mexican investors under Regulation S (non-US person certifications, legends, one-year distribution compliance period). No public announcement of terms until the round closes.
After the first signature and funding on April 10: Form D due by April 25. State notices for the states where the US investors live. Board consent approving the SAFEs and the side letters. Cap table updated with each SAFE and each investor's exemption.
What would change the plan: if the CEO presents the raise and its terms at a public demo day before closing, the US portion should move to Rule 506(c) with verification of every US investor.
Finders and broker-dealers
Paying someone a commission (a percentage of money raised) to find investors is broker activity. If that person is not a registered broker-dealer, the investors introduced may have rescission rights and the exemption may be jeopardized. Pay advisors for advice, not for success fees on capital raised, unless they are registered.
Bad actor disqualification
Rule 506 is unavailable if the company or certain related persons (directors, executive officers, 20% holders, promoters, placement agents) have specified disqualifying events, such as certain securities fraud convictions or regulatory orders. Include bad-actor questions in your director and investor questionnaires.
Frequently asked questions
Do I need to file a Form D for a SAFE round?
Yes, if you rely on Rule 506 (the usual exemption): within 15 days after the first sale, plus state notice filings. Many founders forget; a late filing is better than none.
Can I accept money from non-accredited friends and family?
Legally it is possible under Rule 506(b) with up to 35 sophisticated non-accredited investors, but it triggers disclosure requirements and later investors may object. Most startups avoid it or use Regulation Crowdfunding.
What counts as general solicitation?
Publicly offering the securities, for example posting the raise and its terms on social media, pitching investment terms at an open public event or emailing people with no prior relationship. Talking about your company and product is not itself an offer.
How do I verify an investor is accredited under Rule 506(c)?
Review income or net worth documentation, obtain a third-party verification letter, or, under the SEC staff's March 2025 position, rely on high minimum investment amounts plus written representations.
Can non-US investors invest in my Delaware startup?
Yes. Sales to non-US persons outside the United States can rely on Regulation S, usually alongside Regulation D for US investors. The investor's home-country rules also apply.
Do employee stock options need a securities exemption?
Yes. Most private companies rely on Rule 701 for compensatory grants, within its annual limits and disclosure requirements.