What Is Securities Law (and Why Does It Matter When Raising Capital)?

Securities law is the set of federal and state rules that governs the sale of investment contracts — things like stock, membership interests, convertible notes, and other instruments that give investors a financial stake in a business. The two foundational federal laws are the Securities Act of 1933 and the Securities Exchange Act of 1934, both administered by the U.S. Securities and Exchange Commission (SEC).

The Securities Act of 1933 requires businesses to register securities offerings with the SEC before selling them to the public — or to qualify for an exemption. The Securities Exchange Act of 1934 created the SEC itself and established ongoing reporting requirements for public companies.

State-level securities laws, often called blue sky laws, add another layer. Even when a federal exemption applies, many states require a separate notice filing before you can sell securities to investors in that state.

Securities law matters because selling an ownership stake or investment contract without following the rules puts your business — and you personally — on the hook for civil penalties, disgorgement of funds raised, and potential criminal charges. The SEC can pursue enforcement actions even against small businesses and early-stage founders.

Most entrepreneurs don't think of a handshake deal with a friend or a small angel round as a securities transaction. But if someone gives you money in exchange for an ownership interest or a promise of future returns, it almost certainly is. The label you put on the arrangement doesn't change the legal reality.

The good news is that most early-stage businesses don't need to go through full SEC registration. Exemptions exist specifically for private placements and smaller raises. But those exemptions have conditions, and missing one can mean the offering was never legally valid.

Businesses have several paths to outside capital, and each one carries different securities law implications. The right path depends on how much you're raising, who you're raising it from, and how much ongoing compliance you're willing to take on.

Self-funding and loans don't trigger securities law — borrowing money from a bank or using your own savings isn't a securities transaction. Securities law applies when you're selling an investment interest: equity, convertible debt, or profit-sharing arrangements.

The most common capital-raising paths that do involve securities law are private placements under Regulation D, equity crowdfunding under Regulation Crowdfunding, and Regulation A offerings. Each has different investor eligibility rules, offering size caps, and disclosure requirements. A securities attorney can help you figure out which path fits your situation.

A registered offering means you've filed a registration statement with the SEC — a detailed disclosure document covering your business, management team, financial condition, and the terms of the securities you're selling. Registration is what public companies go through. It's costly, time-consuming, and comes with ongoing quarterly and annual reporting obligations.

An exempt offering means you're raising capital under one of the SEC's approved exemptions from registration. Most small businesses and startups use exempt offerings. The exemptions don't eliminate disclosure requirements — they reduce them — and anti-fraud rules still apply in full.

Choosing the wrong path, or failing to meet the conditions of an exemption, means the offering may be treated as an unregistered public offering. Investors can then demand their money back, and the SEC can pursue enforcement action.

Regulation D is the most widely used exemption framework for private placements. It has 3 main rules, each with different conditions.

Rule 504 allows businesses to raise up to $10 million in a 12-month period without SEC registration. Rule 506(b) has no cap on the offering amount and allows sales to an unlimited number of accredited investors plus up to 35 non-accredited but sophisticated investors — but prohibits general solicitation or advertising. Rule 506(c) also has no cap and allows general solicitation, but every investor must be verified as accredited.

Regulation Crowdfunding (Reg CF) lets businesses raise up to $5 million in a 12-month period from both accredited and non-accredited investors through an SEC-registered funding portal. Regulation A (Reg A) allows raises up to $20 million (Tier 1) or $75 million (Tier 2) in a 12-month period, with more disclosure requirements than Reg D but fewer than a full registration.

Rule 506 offerings preempt state registration requirements, but you still need to file a Form D notice with the SEC within 15 days of the first sale and comply with any state notice filing requirements.

An accredited investor is an individual with income exceeding $200,000 in each of the prior 2 years (or $300,000 combined with a spouse), or a net worth exceeding $1 million excluding their primary residence. The SEC updated the definition in 2020 to also include certain licensed professionals and institutional investors who qualify based on credentials rather than income or net worth alone.

Why it matters: several Regulation D exemptions restrict who can invest. Under Rule 506(b), you can include up to 35 non-accredited investors — but they need to be sophisticated enough to evaluate the investment on their own. Under Rule 506(c), every investor must be accredited, and you need to take reasonable steps to verify that status before accepting their money.

Most early-stage founders raising from friends and family don't realize that a non-accredited investor in a 506(c) offering can invalidate the exemption. That's the kind of detail that's worth getting right before the round closes.

Anti-fraud rules apply to all securities offerings — registered or exempt. Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 make it illegal to make any untrue statement of a material fact, or to omit a material fact that would make your statements misleading, in connection with the purchase or sale of any security.

A material fact is anything a reasonable investor would consider important when deciding whether to invest. That includes your financial condition, how you plan to use the funds, known risks to the business, and any conflicts of interest. You don't have to intend to deceive — omitting something material by accident still creates legal exposure.

In practice, this means your pitch deck, investor agreements, and any written communications with potential investors need to be accurate and complete. If something changes materially after you've shared documents with investors, you may need to update them before closing.

The most common violations in early-stage capital raises fall into a few categories: selling unregistered securities without a valid exemption, making material misrepresentations to investors, using general solicitation in an offering that prohibits it (like Rule 506(b)), and not filing Form D after a Regulation D offering.

The SEC can pursue civil and administrative enforcement actions. Penalties include fines, disgorgement of funds raised, and being barred from future offerings. In cases involving intentional fraud, criminal referrals are possible.

One pattern that comes up often: founders who raise money informally — through a group chat, a social media post, or a pitch at a public event — without realizing that public solicitation triggers different rules. Under Rule 506(b), any general solicitation disqualifies the exemption. If you're posting about your raise publicly, you need to be operating under Rule 506(c) with verified accredited investors only.

Raising capital starts with having the right business structure in place. Before you approach investors, your business needs to be properly formed — with the right entity type, a clear ownership structure, and the records that investors and their attorneys will ask to see.

Bizee helps entrepreneurs form LLCs and corporations, get their Employer Identification Number (EIN), and stay on top of ongoing compliance requirements. We handle the formation paperwork so you can focus on building the business and preparing for your raise.

Securities law is a specialized area, and we always recommend working with a qualified securities attorney for the investor-facing side of a capital raise. But we can make sure your business foundation is solid before that conversation starts.