When a startup sells shares or other securities to investors, US law treats that as a securities offering, and the offering must either be registered with the Securities and Exchange Commission (SEC) or fit an exemption. This guide explains the main exemptions founders hear about, how they differ and what they require.
Why does a private fundraising round need an exemption at all?
Registering a public offering is a long and expensive process designed for companies that sell to the general public. Most early-stage companies instead rely on exemptions: rules that let a company sell securities without full registration, provided it stays within conditions on who can invest, how the offer is marketed and how much is raised.
The SEC publishes a summary of these routes for small businesses. Its page on exempt offerings lists several, and the choice among them shapes who a founder can approach, whether the company can advertise the round and what paperwork follows. Picking a route is therefore part of fundraising strategy, not an afterthought for the lawyers. Founders still working out what kind of round suits their stage may want to start with the overview of startup funding stages.
A few terms are worth defining first:
- Security: a financial instrument such as shares, convertible notes or other investment contracts.
- Accredited investor: a category of investor, defined in SEC rules by income, net worth or professional criteria, who is presumed able to evaluate and bear the risk of a private investment.
- General solicitation: public marketing of an offering, for example advertising it online or at a public event.
- Form D: a short notice filed with the SEC after a private offering begins.
The main exemptions side by side
According to the SEC’s exempt offerings page, the principal routes compare as follows:
| Route | Offering limit | Marketing | Notable conditions |
|---|---|---|---|
| Rule 506(b) | No dollar cap | General solicitation prohibited | Up to 35 non-accredited investors in any 90-day period; Form D within 15 days of first sale |
| Rule 506(c) | No dollar cap | General solicitation permitted | All buyers must be accredited, and the company must take reasonable steps to verify; Form D within 15 days |
| Rule 504 | Up to $10 million in 12 months | Not specified on that page | Often used for regional offerings; Form D within 15 days |
| Regulation Crowdfunding | Up to $5 million | Online through a registered intermediary | Offered via a broker-dealer or funding portal |
| Regulation A | Up to $75 million | Described as a public-offering exemption | Check SEC guidance for conditions |
The first three belong to Regulation D, the SEC’s framework for private placements. Form D, according to the SEC, is required for all three Regulation D routes, is filed online through the SEC’s EDGAR system and carries no filing fee.
What does Rule 506(b) allow?
Rule 506(b) is the traditional private placement. The SEC describes it as a safe harbor, meaning that a company meeting its conditions can rely on the exemption with confidence. There is no cap on the amount raised and no cap on the number of accredited investors.
The trade-off is marketing. Under 506(b), the company may not use general solicitation or advertising to market the securities. In practice that means raising from people with whom the founders or their advisers already have a relationship. A company may also sell to no more than 35 non-accredited investors in any 90-day period, and each of those must have enough financial and business knowledge to evaluate the investment, alone or with a purchaser representative.
The SEC also notes that Rule 506(b) preempts state registration and qualification requirements, though states can still require notice filings and collect fees. Founders therefore often face a federal filing plus state notices.
What changes when a company uses Rule 506(c)?
Rule 506(c) removes the advertising ban. A company may publicize the round, but every purchaser must be an accredited investor, and the company must take reasonable steps to verify that status. Self-certification alone is not the point of this route; the verification step is the price of being allowed to market publicly.
For a founder, the question is whether public visibility is worth the verification burden. A company with a strong online audience might prefer 506(c); a company raising from a small, known circle may find 506(b) simpler. The same 15-day Form D deadline applies to both.
Where do Rule 504 and Regulation Crowdfunding fit?
Rule 504 is part of Regulation D but has a lower ceiling: up to $10 million in a 12-month period, according to the SEC. The agency says it is often used for regional, multi-state offerings. Companies relying on it still file Form D within 15 days after the first sale.
Regulation Crowdfunding is different in kind. A company can raise up to $5 million in a 12-month period, and all transactions must run online through an SEC-registered intermediary, either a broker-dealer or a funding portal. The SEC page says non-accredited investors face limits on how much they can invest across all crowdfunding offerings in a 12-month period, and that securities bought this way generally cannot be resold for one year. Offerings are also subject to “bad actor” disqualification provisions, which restrict participation by issuers and certain related people with specified disciplinary histories.
Crowdfunding suits companies with a consumer-facing product and a community that wants to own a piece of it. It also means many small investors on the cap table, which brings its own administrative load.
How does Regulation A differ from the private routes?
The SEC describes Regulation A as an exemption for public offerings, with a ceiling of up to $75 million. Because it is aimed at public offerings, it is generally considered by larger or more established businesses than a typical seed-stage company. Founders weighing it should read the SEC’s Regulation A guidance and take legal advice on the requirements.
A worked example of limits and deadlines
Illustrative arithmetic shows how the ceilings and clocks interact. Suppose a company raises under Rule 504, which has a $10 million limit in a 12-month period.
- In months 1 to 3, it sells $2.5 million of shares.
- In months 4 to 6, it sells a further $3 million.
- Total sold so far: $2.5 million + $3 million = $5.5 million.
- Remaining room under the $10 million limit within that same 12-month window: $10 million - $5.5 million = $4.5 million.
This is simplified, since real-world counting rules and any other offerings the company has run can affect the calculation, which is a question for securities counsel. The deadline arithmetic is simpler. If the first sale closes on October 1, the Form D is due within 15 days, so by October 16.
Mistakes founders commonly make
The exemptions are conditions, not labels. A few patterns cause trouble:
- Mixing marketing with the wrong route. Advertising a round while relying on 506(b) undermines the exemption, because that route prohibits general solicitation.
- Missing the Form D deadline. The 15-day clock starts at the first sale, not when the round closes.
- Ignoring state requirements. Federal preemption under 506(b) does not remove state notice filings and fees.
- Raising before the story is ready. Legal structure cannot substitute for evidence that customers want the product. Pieces like what product-market fit really means and how to build a minimum viable product describe the groundwork investors tend to look for.
- Treating raised cash as profit. Money from investors is not revenue; the distinction is explained in cash flow vs profit.
Choosing a route: questions to settle first
A founder can narrow the options by answering four questions. Who is the likely investor: friends, angels, institutions or customers? Does the company need to advertise the round? How much does it plan to raise within 12 months? And can it handle verification, ongoing disclosure and many small shareholders? Answers to these usually point to one route, and a securities lawyer can confirm the fit before any money changes hands.
Conclusion: match the route to the round
The exemptions differ mainly in three dimensions: how much can be raised, who may invest and whether the company may advertise. Rule 506(b) favors quiet, relationship-driven rounds; 506(c) trades verification for visibility; Rule 504 and Regulation Crowdfunding serve smaller or community-led raises; and Regulation A reaches toward a public audience. Rules and thresholds can change, so founders should confirm current requirements with the SEC and qualified counsel before offering securities.
This article is general information, not financial, investment, tax or legal advice.
Sources: U.S. Securities and Exchange Commission
