Raising capital is a pivotal aspect of a company’s growth and development. In the United States, any offering of securities must be registered with the Securities and Exchange Commission (SEC) unless it qualifies for an available exemption. Understanding the various exemptions and regulations available for private companies is essential for entrepreneurs, founders, and investors alike.

In this comprehensive guide, we will explore several key exemptions and regulations under US federal securities law that companies can utilize to raise capital. Each exemption comes with its own set of rules, limitations, and requirements, making it crucial to choose the one that best suits your company’s needs.

1. Regulation CF (Crowdfunding)

Amount to be Raised: Up to $1,070,000 in a 12-month period.

Type of Issuers: U.S. entities only, with certain limitations.

Investors: Open to any investor, including accredited and non-accredited investors. However, limits apply to non-accredited investors based on their net worth or income.

Marketing Limitations: Issuers can only communicate and market through a registered crowdfunding portal. Limited factual communications are allowed outside the portal.

Resale Limitations: Securities are restricted and generally cannot be resold for one year unless specific conditions are met.

Filing Requirements: Issuers must file Form C with the SEC and update it annually while securities issued in Regulation CF offerings are outstanding.

Information Requirements: Issuers must provide disclosures about the company and the offering. Financial statements, including audited ones if the offering exceeds $535,000, are required.

General Comments: Regulation CF is suitable for smaller-scale capital raises, but the $1.07 million cap on gross proceeds can be limiting. Issuers must use registered crowdfunding portals.

2. Regulation D Rule 506(b)

Amount to be Raised: Unlimited.

Type of Issuers: Open to any issuer, including foreign issuers, with certain limitations (e.g., “bad actor” disqualifications).

Investors: Unlimited accredited investors and up to 35 non-accredited but financially sophisticated investors.

Marketing Limitations: No general solicitation or advertising allowed. Offers and sales are limited to investors with whom the issuer has a pre-existing relationship.

Resale Limitations: Securities are restricted and generally not freely tradeable for at least one year.

Filing Requirements: Issuers must file Form D with the SEC within 15 days after the first sale. Notice filings are also required in every state where investors reside.

Information Requirements: If accepting money from non-accredited investors, issuers must provide a private placement memorandum with specified disclosures as per Rule 502 of Regulation D.

General Comments: This exemption may not be suitable for online offerings due to solicitation and advertising restrictions.

3. Regulation D Rule 506(c)

Amount to be Raised: Unlimited.

Type of Issuers: Open to any issuer, including foreign issuers, with certain limitations (e.g., “bad actor” disqualifications).

Investors: Restricted to accredited investors only.

Marketing Limitations: General solicitation and advertising are permitted.

Resale Limitations: Securities remain restricted.

Filing Requirements: Issuers must file Form D with the SEC within 15 days after the first sale and make notice filings in states where investors reside.

Information Requirements: No specific information requirements.

General Comments: Many issuers prefer this exemption as it allows general solicitation, but steps must be taken to verify accredited investor status.

4. Regulation A+ (Tier 1)

Amount to be Raised: Up to $20 million per year.

Type of Issuers: Open to U.S. and Canadian entities, subject to eligibility criteria. Certain entity types are ineligible.

Investors: Open to both accredited and non-accredited investors.

Marketing Limitations: Marketing and advertising are generally allowed with some restrictions.

Resale Limitations: Securities are unrestricted, but trading may be limited.

Filing Requirements: Issuers must file Form 1-A with the SEC and obtain qualification. Shareholder counts are required for Section 12(g) registration purposes.

Information Requirements: Form 1-A mandates detailed disclosures about the issuer, including financial statements, which may not require auditing.

General Comments: Issuers must comply with individual state “blue sky” laws if planning to sell securities in various states.

5. Regulation A+ (Tier 2)

Amount to be Raised: Up to $50 million per year.

Type of Issuers: Open to U.S. and Canadian entities, subject to eligibility criteria. Certain entity types are ineligible.

Investors: Open to any accredited and non-accredited investors, with limitations on non-accredited investors’ investments based on net worth or income.

Marketing Limitations: Marketing and advertising are allowed with specific conditions, including disclaimers.

Resale Limitations: Securities are unrestricted at the federal level.

Filing Requirements: Issuers must file Form 1-A with the SEC and obtain qualification. Ongoing reporting obligations apply post-offering.

Information Requirements: Form 1-A requires extensive disclosures, including audited financial statements, similar to those in an initial public offering.

General Comments: Tier 2 offerings are exempt from state “blue sky” laws but require the services of a transfer agent.

6. Regulation S

Regulation S provides an exemption from the registration requirements of the Securities Act for offerings made outside of the United States by both U.S. and foreign issuers. Compliance with two general conditions is required: (i) the offer or sale must occur in an “offshore transaction” and (ii) no “directed selling efforts” into the United States are allowed.

Conclusion

Navigating the complexities of US federal securities law exemptions for capital raising is essential for companies looking to secure funding while complying with regulatory requirements. Each exemption offers distinct advantages and limitations, making it crucial to select the one that aligns with your company’s goals and circumstances. Additionally, staying up-to-date with regulatory changes is essential, as securities laws and regulations can evolve over time. Consult with legal and financial experts to ensure your capital-raising efforts are compliant and effective in achieving your business objectives.