Regulation D Basics: What Founders Need to Know Before Raising Capital

If you're raising money from investors — even informally — federal securities laws apply. Selling equity in your company is a securities offering. Regulation D provides a path to raise capital without full SEC registration, but it comes with real requirements that many founders don't know about until they've already made a mistake.

What Is Regulation D?

Regulation D is a set of SEC rules that provide exemptions from the registration requirements of the Securities Act of 1933. The most commonly used exemptions are Rule 504 (up to $10 million in a 12-month period), Rule 506(b) (unlimited amount, up to 35 non-accredited investors), and Rule 506(c) (unlimited amount, accredited investors only, general solicitation permitted). Most early-stage raises use Rule 506(b) or 506(c).

Accredited Investors

Rules 506(b) and 506(c) have different requirements regarding accredited investors. An accredited investor is generally an individual with a net worth over $1 million (excluding primary residence) or annual income over $200,000 ($300,000 with spouse) in each of the two most recent years. Under Rule 506(b), you can have up to 35 non-accredited investors, but they must be "sophisticated" — meaning they have sufficient knowledge and experience to evaluate the investment. Under Rule 506(c), all investors must be accredited, and you must take reasonable steps to verify their accredited status.

The Form D Requirement

If you're relying on a Regulation D exemption, you must file a Form D with the SEC within 15 days of the first sale of securities. This is a notice filing — it doesn't require SEC approval — but failing to file can affect your ability to rely on the exemption in the future. Many founders don't know about this requirement until after the fact.

State Securities Laws

Federal Regulation D doesn't preempt state securities laws. Most states have their own registration or notice filing requirements for securities offerings. Florida, for example, requires a notice filing with the Office of Financial Regulation for most Regulation D offerings. These state requirements vary and can be easy to overlook.

What This Means in Practice

If you're planning to raise capital from investors — even from friends and family — you need to understand the securities law framework before you start. Selling securities without complying with applicable exemptions can result in rescission rights for investors (the right to get their money back) and potential civil and criminal liability. The Capital & Securities services page covers the full scope of capital-raising work available through this firm.