Raising capital for a business involves more than identifying investors and presenting a compelling ideas; it also requires strict compliance with federal and state securities laws. Missteps, often stemming from misunderstandings or informal planning, can lead to serious consequences, including regulatory enforcement, investor rescission demands, and long-term reputational damage. A common pitfall is the assumption that “friends-and-family” investments don’t require a legal framework, when in fact they can expose a company to significant liability. Understanding the difference between a registered offering, a lawful exempt offering, and an unlawful sale of securities is essential. The attorneys at RR&A regularly guide clients through this complex landscape to help them raise capital without crossing regulatory lines.
Understanding Registered Offerings
Registered offerings must comply with the Securities Act of 1933. In most cases, companies file a registration statement with the Securities and Exchange Commission (“SEC”). These filings include audited financial statements, executive compensation details, risk factors, and other disclosures.
Although registration permits a company to publicly advertise and sell to a broad base of investors, including non-accredited individuals, it does have higher costs. Ongoing compliance obligations, including quarterly and annual reports, can overwhelm companies without sufficient internal resources.
In most early-stage capital raises, a full registration imposes disproportionate burdens. RR&A helps clients determine whether registration is necessary or whether an exemption fits the company’s capital strategy more effectively.
Using an Exemption to Raise Capital Legally
Most private companies rely on an exemption from SEC registration. Regulation D offers the most commonly used exemptions. Selecting the right option requires an understanding of investor qualifications, advertising restrictions, and filing requirements.
1. Rule 504 allows companies to raise to ten million dollars in any twelve-month period. It typically prohibits general solicitation, though certain states may allow limited advertising if specific conditions are met.
2. Rule 506(b) permits an unlimited amount of capital to be raised from accredited investors, along with up to thirty-five non-accredited investors. However, the offering must not involve general advertising.
3. Rule 506(c) also permits unlimited fundraising, but the company must verify each investor’s accredited status. Advertising is allowed under this rule, but verification requirements are strict.
Other exemptions include Regulation Crowdfunding (“Reg CF”), which allows up to five million dollars to be raised through a SEC-registered portal, and Regulation A, often referred to as a “mini-IPO,” which allows offerings up to seventy-five million dollars with more limited reporting obligations.
Each exemption contains nuances that impact how companies structure their offering documents, communications, and investor relations. RR&A helps clients navigate these rules to protect their offering from becoming noncompliant.
Recognizing When an Offering Becomes Illegal
An offering becomes illegal when it fails to qualify as either registered or exempt. Common violations include accepting investment funds without verifying investor status under Rule 506(c), publicly advertising a Rule 506(b) offering, or failing to make required state-level filings. Even informal conversations on social media can inadvertently convert a private offering into an illegal general solicitation.
Mistakes in securities offerings often arise not from intent but from a lack of planning. Even minor compliance failures may require a company to return investor funds, face regulatory scrutiny, or delay future fundraising. RR&A helps clients avoid these traps through proactive guidance, proper documentation, and investor screening protocols.
Key Questions to Ask Before Offering Securities
Every business planning to raise funds through a securities offering should ask the following:
1. Who are the intended investors, and do they qualify as accredited under federal law?
2. Will the company promote the offering publicly or privately?
3. Does the company have a reliable process to verify investor status?
4. Have all necessary federal and state notices been prepared and filed?
RR&A provides clarity on these questions and delivers custom legal strategies tailored to each company’s growth goals.
Prevent the Problem Before It Starts
A successful capital raise begins with legal compliance. Knowing whether your securities offering is registered, exempt, or illegal can protect your company from costly consequences. Each type of offering presents unique risks, and each exemption contains requirements that demand attention and care.
RR&A guides companies through this process with a focus on strategic planning, clear documentation, and regulatory compliance. We believe that careful structuring on the front end prevents expensive mistakes later. Contact RR&A today to discuss your capital raising plans and avoid pitfalls that could derail your growth.
Jacob is an Associate at R. Reese & Associates and part of the Corporate, Transactions, and Land & Title Teams. To learn more about Jacob, visit his attorney page.
Disclaimer: The information and material on this website is general information about our practice and firm. This information does not offer specific legal advice and the use of this information does not create an attorney-client relationship with RR&A or any of its attorneys. The information on this website should not be used for legal advice, and persons should not act upon the information on this website without engaging professional legal counsel.
