When you sell stock, a SAFE or a convertible note, you are selling a security. Unless the offering is registered with the SEC, it needs an exemption. Most US startups rely on Rule 506 of Regulation D. The rules are manageable, but mistakes can give investors the right to their money back.
Rule 506(b)
- No general solicitation or advertising to market the offering.1
- Unlimited accredited investors, and up to 35 non-accredited investors in any 90-day period.1
- If any non-accredited investors participate, the company must give them disclosure documents and financial information similar to a Regulation A offering.1
Rule 506(c)
- General solicitation is allowed. You can talk about the raise publicly.2
- Every purchaser must be accredited, and the company must take reasonable steps to verify it, not just rely on a checkbox.2
Who is accredited
Under the SEC's definition, individuals qualify with:3
- income over $200,000 (or $300,000 with a spouse or partner) in each of the prior two years, with a reasonable expectation of the same this year; or
- net worth over $1 million, alone or with a spouse or partner, excluding their primary residence; or
- certain professional licenses (Series 7, 65 or 82), or a role as a director, executive officer or general partner of the company selling the securities.
Many entities qualify too, including those with more than $5 million in investments.3
Form D
Companies relying on Rule 506 must file a notice on Form D with the SEC within 15 days after the first sale of securities in the offering.1,2 States can require their own notice filings and fees.1 Both rules are subject to "bad actor" disqualification.1,2
What diligence will check
- Form D filings for each prior round, and any required state notice filings.
- Accredited investor representations, and verification records for any 506(c) raise.
- That no public marketing was used for a 506(b) round.
Securities rules have details and exceptions not covered here. Work with a securities lawyer before you raise.