When raising money for any type of business, make sure that you understand SEC rules and regulations before soliciting any investment. Below are some some links to information provided to investors and businesses by the SEC. If you are considering raising money for a businesses, then we recommend that you seek the advice of financial and legal professionals before soliciting any investor.
What is the SEC?
The U.S. Securities and Exchange Commission (SEC) was created during the Great Depression, in the aftermath of the stock market crash of 1929. A primary causes of the market crash was the long and intense period of speculative investment that proceeded it, which was fueled in part by individuals and businesses manipulating the market to increase their stock value. During that period millions of people got caught up in a frenzy of investment, where many people borrowed money and invested their savings into stocks - pushing stock prices and valuations to unsustainable levels. Following the stock market crash, the government took steps to protect investors from deceit, misrepresentation, and fraud.
Securities Act of 1933
The SEC was created to enforce the Securities Act of 1933. Often referred to as the "truth in securities" law, the act ensures that investors are provided important information about securities. The SEC helps to protect investors by requiring all businesses that sell securities to disclose important financial information through a registration process, or qualify for an exemption to registration. The information provided through SEC registration is intended to help investors, not the government, to make informed decisions when it comes to businesses and the securities that they sell.
Definition of Securities
Securities are any method that a business uses to raise money from the public. Securities can refer to, "any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract..." (link
) If you are raising money for your business by selling ownership or borrowing money from private individuals, then those transactions are likely defined as "securities" under SEC rules and regulations.
State Securities Laws
In addition to understanding SEC registration requirements, it is also important for businesses to understand the securities laws in individual states. Every state has its own securities laws, and many of those laws were put in place before the creation of the SEC. Kansas enacted the first securities laws in 1911, and other states soon followed. The longstanding nature of states' securities laws means those laws can vary and change, so a business needs to understand the laws in every state where it intends to sell securities.
The SEC Registration Process
Every business, regardless of size, is required to register the sale of securities with the SEC. The forms that a business must complete and file with the SEC are significant. Given the length and technical nature of the information that is required, businesses often hire attorneys to help complete the paperwork. In addition to information about the business and the securities it offers, SEC filings often require financial statements that are certified by an independent accountant. The scope and type of information required for an SEC filing can potentially lead to a lengthy and expensive process.
In addition to registered offerings, the SEC also offers alternative paths for businesses to offer or sell securities. Those paths are available if a business is offering securities that qualify for one or more SEC defined "exemptions". Offerings that meet one or more of those requirements are referred to as "Exempt Offerings", which means that they are exempt from the general SEC registration requirements.
Exempt Offering Types
Below are summaries and links to information about different exempt offering types. Do not rely on this information (or the information on this website) to make project financing decisions. You should consult financial and legal experts that specialize in SEC rules and regulations, before soliciting any investors.
Rule 506(b) Private Placements
- “allow businesses to raise unlimited capital from investors with whom the business has a relationship and who meet certain wealth thresholds or have certain professional credentials. A business cannot use general solicitation in a 506(b) private placement.” An offering under Rule 506(b) is subject to the following requirements:
"no general solicitation or advertising to market the securities"
"securities may not be sold to more than 35 non-accredited investors (all non-accredited investors, either alone or with a purchaser representative, must meet the legal standard of having sufficient knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of the prospective investment)"
Rule 506(c) General Solicitation Offerings
- “allow businesses to raise unlimited capital by broadly soliciting investors who meet certain wealth thresholds or have certain professional credentials.” An offering under Rule 506(c) is subject to the following requirements:
"all purchasers in the offering are accredited investors"
"the issuer takes reasonable steps to verify purchasers' accredited investor status and"
"certain other conditions in Regulation D are satisfied"
Rule 504 Limited Offerings
- “allow businesses to raise up to $10 million in a 12-month period, in many cases from investors with whom the business has a relationship.”
Rule 504 of Regulation D exempts from registration the offer and sale of up to $10 million of securities in a 12-month period. A business is required to file a notice with the Commission on Form D within 15 days after the first sale of securities in the offering. In addition, a business must comply with state securities laws and regulations in the states in which securities are offered or sold.
Filing a Form D notice
- “used to file a notice of an exempt offering of securities with the SEC.”
Form D is used to file a notice of an exempt offering of securities with the SEC. The federal securities laws require the notice to be filed by businesses that have sold securities without registration under the Securities Act of 1933 in an offering made under Rule 504 or 506 of Regulation D or Section 4(a)(5) of the Securities Act... A business must file this notice within 15 days after the first sale of securities in the offering. For this purpose, the date of first sale is the date on which the first investor is irrevocably contractually committed to invest.
Regulation Crowdfunding Offerings
- “allow eligible businesses to raise up to $5 million in investment capital in a 12-month period from investors online via a registered funding portal.” Regulation Crowdfunding Offerings are subject to the following rules:
"require all transactions under Regulation Crowdfunding to take place online through an SEC-registered intermediary, either a broker-dealer or a funding portal"
"permit a business to raise a maximum aggregate amount of $5 million through crowdfunding offerings in a 12-month period"
"limit the amount individual non-accredited investors can invest across all crowdfunding offerings in a 12-month period and"
"require disclosure of information in filings with the Commission and to investors and the intermediary facilitating the offering"
Regulation A Offerings
(sometimes called a “mini-IPO”) - “allow eligible businesses to raise up to $20 million in a 12-month period in a Tier 1 offering and up to $75 million in a 12-month period in a Tier 2 offering through a process similar to, but less extensive than, a registered offering.”
Regulation A has two offering tiers: Tier 1, for offerings of up to $20 million in a 12-month period; and Tier 2, for offerings of up to $75 million in a 12-month period. For offerings of up to $20 million, businesses can elect to proceed under the requirements for either Tier 1 or Tier 2.
- allows “businesses to raise capital within a single state according to state law. Many states limit the offering to between $1 million to $5 million in a 12-month period.” Under Intrastate Offerings, a business must comply with the following:
"be organized in the state where it is offering the securities"
"carry out a significant amount of its business in that state and"
"make offers and sales only to residents of that state"
Employee benefit plans - Rule 701
- “exempts certain sales of securities made to compensate employees, consultants and advisors.”
This exemption is not available to Exchange Act reporting businesses. A business can sell at least $1 million of securities under this exemption, regardless of its size. A business can sell even more if it satisfies certain formulas based on its assets or on the number of its outstanding securities. If a business sells more than $10 million in securities in a 12-month period, it is required to provide certain financial and other disclosure to the persons that received securities in that period...
A common characteristic of "exempt offerings" under SEC rules and regulations is the requirement that some or all of the investors be "Accredited Investors". For more information about the SEC definition of an accredited investor, please visit the SEC's Accredited Investor page: