Picking the right SEC exemption for your fundraise

Raising money for your startup takes more than just finding the right investors and negotiating a term sheet – you also need to understand and follow the Securities and Exchange Commission’s (SEC) regulations.

Why? When you’re fundraising, the stock you’re offering counts as ‘securities’ – financial assets that give investors a stake in your business. The SEC regulates the sale of securities to protect investors, and selling them usually requires you to go through a long and expensive registration process – something most startups want to avoid.

That’s why some exemptions have been introduced, which mean you don’t have to fully register (saving you time and money). Depending on how you’re doing your fundraising, you’ll need to know which rules apply and what filings are necessary to comply with the law.

In this article, we’ll walk you through the main SEC exemptions that apply to fundraises, so you know which option best suits your startup’s goals.

🎥Watch: A discussion with Emily Wu

SeedLegals Co-founder and CEO Anthony Rose sits down with, Emily Wu, a partner at Lumia, to discuss the various SEC fundraising rules.

Watch the webinar below to find out more and check out the slides here.

You can also read the transcript.

Which SEC exemptions apply to fundraises?

The SEC offers four main types of exemptions for private companies looking to raise money in the US:

Regulation A,
Regulation CF,
Regulation D, and
Regulation S.

Each has different requirements, costs, and investor eligibility rules. Here’s an overview to help you determine which is right for you.

What is Regulation A?

Regulation A is sometimes called a “mini-IPO”. It’s designed for larger, high-volume fundraises and allows for the sale of freely tradable securities.

This option is most relevant for companies that need to raise large amounts of money (up to $75 million) from the public – and the securities can be freely traded. But the registration process can be time-intensive (up to six months), and costly, making it a better fit for companies with high transaction volumes.

For example, a crypto trading platform aiming to raise $50 million and seeking tradable securities would find Regulation A a suitable choice. For smaller startups, though, this route is often excessive due to the lengthy and expensive process.

What is Regulation CF?

Regulation CF (or Regulation Crowdfunding), is aimed at startups that want to reach a broad range of investors through crowdfunding sites like SeedInvest, InfraShares, FlashFunders, Republic or WeFunder.

These are ideal for consumer-focused companies aiming to raise funds from their user base as it lets companies reach a large audience and run public campaigns, which can build brand loyalty and expand reach.

But the filings can be complex, especially for raises over $1 million (which may require audited financials). Also, all the funding must go through a registered crowdfunding platform.

What is Regulation D?

Regulation D is by far the most popular option for startups raising private funding from friends and family or even angels and VCs.

It has three main sub-rules, each with its own investor limits:

Rule 504: Allows up to $10 million to be raised in a year from both accredited and non-accredited investors, with some restrictions on marketing publicly.

Rule 506(b): Allows unlimited fundraising with up to 35 non-accredited investors but limits advertising to established investor relationships (so, you can’t advertise publicly).

Rule 506(c): Doesn’t impose any cap on fundraising amount and permits public advertising, but only accredited investors can participate.

What is Regulation S?

If your startup is only raising funds from non-US investors, Regulation S allows you to do so without registering with the SEC. If you’re relying on this, it’s essential you still check specific international laws that may apply in your investors’ countries.

Which exemption should I use for my fundraise?

For most companies, one of the three sub-rules within Regulation D is going to be the best option. You can use the flowchart below to help you pick the right one for you.

An overview of each exemption

Do I need a lawyer to help with this?

While you might be able to handle some SEC filings on your own, first-time founders will benefit from working with a law firm like Lumia – they’re experts in identifying and making the right filings for you.

Plus, they can help with things like checking investor eligibility, which is key for keeping your exemption status. Plus, since these filings are public, there’s a chance competitors or the press might see them, so you want to make sure they’re accurate.