Raising money from investors in a private company is a regulated securities transaction, and the practical work of how to raise money from investors comes down to four things: picking a legal exemption from SEC registration, preparing the disclosures and deal documents that exemption requires, closing on negotiated terms, and completing the federal and state filings that follow the sale. Get those right and the raise stands up under scrutiny. Get them wrong and investors may have the right to demand their money back.
Why Every Private Raise Needs an Exemption
Under the Securities Act of 1933, offering or selling any security without registration is illegal unless the offering fits within a recognized exemption. Registration means filing a detailed prospectus with the SEC, undergoing staff review, and meeting ongoing public-company reporting requirements. For a startup raising a seed round or a growing company bringing in its first institutional investors, that process is impractical. Nearly every private fundraise relies on an exemption instead, and the most common ones sit inside Regulation D.
Choosing a Regulation D Exemption
Two Regulation D exemptions do most of the work in private fundraising, and the choice between them shapes everything else about the raise.
Rule 506(b) is the traditional path. You can raise an unlimited amount from an unlimited number of accredited investors and up to 35 non-accredited investors who are financially sophisticated. The trade-off: no advertising and no public solicitation. Every investor must come through existing relationships or warm introductions.
Rule 506(c) flips the restriction. You can advertise freely, post on social media, or run ads to attract investors. But every purchaser must be an accredited investor, and you have to take reasonable steps to verify their accredited status rather than accept self-certification.1U.S. Securities and Exchange Commission. General Solicitation – Rule 506(c) Verification typically means reviewing tax returns or bank statements, or obtaining a written confirmation from a broker-dealer, attorney, or CPA.
A third option, Regulation Crowdfunding, lets companies raise up to $5 million in a 12-month period from both accredited and non-accredited investors through an SEC-registered online platform.2U.S. Securities and Exchange Commission. Regulation Crowdfunding Individual investment limits apply based on each investor’s income and net worth. It suits consumer-facing companies with a community of small backers; platform fees and compliance costs eat into smaller raises.
Who Counts as an Accredited Investor
The accredited investor definition sets the dividing line for who can participate in most private offerings. An individual qualifies with a net worth above $1 million (excluding the primary residence) or income above $200,000 in each of the two most recent years with a reasonable expectation of the same in the current year. The joint threshold with a spouse or spousal equivalent is $300,000.3eCFR. 17 CFR 230.501 – Definitions and Terms Used in Regulation D
Accredited status also extends to holders of certain professional certifications, including Series 7, Series 65, and Series 82 licenses, and to entities such as banks, insurance companies, registered investment companies, and trusts with assets over $5 million. If you plan to use Rule 506(c), every dollar must come from a verified accredited investor. Under 506(b), the small window for non-accredited investors triggers additional disclosure requirements that can rival the cost of a registered offering, so most companies simply cap the pool at accredited investors even when they don’t have to.
Documents to Have Ready Before You Pitch
A pitch deck comes first. It should explain what problem the company solves, how you solve it, how large the opportunity is, and how the new capital will drive growth. Keep it under 20 slides. Market sizing should include the total addressable market so investors can gauge the ceiling, but inflated TAM figures erode credibility faster than almost anything else.
Financial projections covering three to five years should include income statements, balance sheets, and cash flow forecasts. The “use of proceeds” section deserves special care because it tells the investor exactly where the money is going. Vague language like “general corporate purposes” invites skepticism. A capitalization table showing every existing equity holder, option pool, and outstanding convertible instrument is essential for any investor evaluating how much of the company they will own after investing.
The Private Placement Memorandum
For offerings under Regulation D, many companies prepare a Private Placement Memorandum that formally discloses the business, its risks, and the terms of the offering. A PPM is not strictly required for every 506(b) or 506(c) offering, but it creates a documented record that all material information was provided, which is the best defense if an investor later claims they were misled.4Financial Industry Regulatory Authority (FINRA). Private Placements If the offering includes any non-accredited investors, disclosure documents become effectively mandatory.
The Bad Actor Check
Before filing anything, confirm that no “covered person” associated with the company triggers the bad actor disqualification rules under Rule 506(d). Covered persons include the company itself, its directors and executive officers, general partners, managing members, and anyone who will receive transaction-based compensation for the offering. A disqualifying event includes felony or misdemeanor convictions within the past ten years related to securities fraud, false SEC filings, or the conduct of certain financial businesses. SEC cease-and-desist orders, court injunctions, and certain state regulatory bars also trigger disqualification.5Federal Register. Disqualification of Felons and Other Bad Actors From Rule 506 Offerings If a covered person has a disqualifying event, the company loses the ability to rely on Rule 506 entirely unless the event occurred before September 23, 2013, or you can show you did not know about it despite reasonable care.
Finding Investors and Getting Through Diligence
How you find investors depends on which exemption you chose. Under Rule 506(b), you are limited to people you already know or can reach through warm introductions from your network, attorneys, or existing investors. Under Rule 506(c), you can post the offering publicly on platforms like AngelList, run advertisements, or pitch at demo days. Either way, most institutional capital still flows through relationships. A cold pitch to a venture fund almost never produces a term sheet; a warm introduction from a founder in that fund’s portfolio almost always gets a meeting.
Once an investor shows interest, evaluation begins with the pitch deck and financials and then moves into due diligence. Due diligence is more invasive than most first-time founders expect. Investors will request access to a secure data room containing tax returns, employment agreements, customer contracts, intellectual property filings, and corporate governance documents such as bylaws and articles of incorporation. They will verify that revenue figures are real and recurring, run background checks on the founding team, and may interview customers or suppliers.
Timelines range from a few weeks for a small angel check to several months for a large institutional round. During that period, communicate proactively. Silence from the company side during diligence makes investors nervous, and nervous investors walk away.
Term Sheet to Closing
The term sheet comes first. It is a non-binding summary of the deal’s economic terms (valuation, investment amount, share price) and governance terms (board seats, protective provisions, information rights). “Non-binding” is somewhat misleading: while the economic terms can technically shift, the term sheet sets expectations that are hard to renegotiate without damaging the relationship. Treat it as the real negotiation.
After signing, lawyers on both sides draft the definitive documents: a stock purchase agreement, an investors’ rights agreement, a voting agreement, and an amended certificate of incorporation reflecting the new share class. Funds move by wire to the company’s bank account or through an escrow intermediary that holds the capital until closing conditions are met. Once the wire clears and signatures are collected, the company issues shares and updates its capitalization table.
Early-stage deals often skip a priced round entirely and use a Simple Agreement for Future Equity or a convertible note. A SAFE carries no interest and no maturity date; the investor’s cash converts to equity when the company raises a priced round. A convertible note is structured as a short-term loan that accrues interest and has a maturity date by which it must convert or be repaid. Both commonly include a valuation cap (a ceiling company valuation at which the instrument converts) and a discount off the price per share paid by later investors. Priced rounds bring preferred stock with liquidation preferences, anti-dilution protection, and pro-rata rights, all negotiated in the term sheet.
Filings and Obligations After the Money Arrives
Closing does not end the legal work. Several requirements kick in immediately.
Form D and Blue Sky Filings
Form D must be filed with the SEC within 15 days after the first sale of securities in the offering.6U.S. Securities and Exchange Commission. Filing a Form D Notice Missing that deadline can produce administrative penalties or loss of the securities exemption, and some states treat a late Form D as grounds to deny the state-level filing.
Beyond the federal filing, notice filings are required under state “Blue Sky” laws in every state where an investor resides. Each state sets its own fees, which can range from under $100 to over $1,000 depending on the state and the offering size. A securities attorney typically handles these in bulk, but the aggregate cost across multiple states adds up quickly for a geographically dispersed investor base.
Reporting to Investors
Institutional investors almost always negotiate information rights as part of the deal. Typical obligations include audited annual financial statements within 90 to 180 days after fiscal year-end, unaudited quarterly statements within 45 days of quarter-end, and a board-approved annual budget and business plan before the start of each fiscal year. Once those terms sit in the investors’ rights agreement, they are contractual obligations, not courtesies.
A Tax Rule Worth Planning Around at the Start
If the company is structured as a C corporation, investors who hold their stock for at least five years may qualify to exclude up to 100% of their capital gains from federal income tax under Section 1202 of the Internal Revenue Code. The company must be a “qualified small business,” meaning its aggregate gross assets never exceeded $75 million at the time the stock was issued.7Office of the Law Revision Counsel. 26 USC 1202 – Partial Exclusion for Gain From Certain Small Business Stock
Not every industry qualifies. Companies in personal services, banking, insurance, finance, farming, mining, and hospitality are excluded.8U.S. Small Business Administration. Qualified Small Business Stock: What Is It and How to Use It Technology, manufacturing, retail, and wholesale businesses generally do qualify. Savvy investors will ask about QSBS eligibility during diligence, and structuring correctly at the outset is far easier than restructuring later.
Mistakes That Void the Exemption
A few errors show up repeatedly, and any one of them can derail a raise or create legal exposure that outlasts the company.
- Accepting money before confirming the exemption, verifying accredited status, or preparing required disclosures. This can void the exemption retroactively.
- Advertising under 506(b). Posting a fundraise on social media or at a public event while relying on 506(b) constitutes general solicitation and kills the exemption.
- Skipping Blue Sky filings. Some founders file the federal Form D and forget the state filings entirely. State regulators do enforce these requirements, and penalties vary widely.
- Inconsistent financial data. If the numbers in the pitch deck do not match the data room, investors will assume the optimistic version is the lie, and errors in financial disclosures can create legal liability if an investor claims they were misled.
- Paying unregistered finders. Promising someone a percentage of what they raise, when that person is not registered as a broker-dealer, is transaction-based compensation for securities sales in the SEC’s view. Using an unregistered intermediary can jeopardize the entire exemption, and if the exemption fails, investors may have the right to demand their money back.
Securities law is unforgiving about procedural mistakes, and the consequences tend to surface at the worst possible time: when the company is struggling and an unhappy investor starts looking for legal remedies. Getting compliance right at the outset costs a fraction of what it costs to fix later.