If you accept money from anyone for your business or fund, you are selling a "security." In the US, every security sale must be either Registered with the SEC (which costs millions, like an IPO) or Exempt.
99% of private funds and startups operate under an Exemption. The most common exemption is Regulation D.
1. The Basics: What is a Security?
The Howey Test
An investment is a security if it meets these criteria:
- It is an investment of money.
- There is an expectation of profits.
- The investment of money is in a common enterprise.
- Any profit comes from the efforts of a promoter or third party.
2. Regulation D (Reg D)
Reg D contains rules that allow companies to raise capital without registering securities with the SEC. It is the gold standard for private placements.
3. The Big Comparison: 506(b) vs 506(c)
This is the most critical decision you will make. You typically must choose one path.
| Feature | Rule 506(b) | Rule 506(c) |
|---|---|---|
| Advertising | ❌ STRICTLY PROHIBITED. No social media, no cold emails. | ✅ ALLOWED. Advertise to the world. |
| Relationship | Must have a pre-existing, substantial relationship. | No prior relationship needed. |
| Investors | Unlimited Accredited + up to 35 Non-Accredited (Sophisticated). | Accredited Investors ONLY. |
| Verification | Self-certification (Investor checks a box). | Rigorous verification required (CPA letter, tax returns). |
4. What is an Accredited Investor?
An accredited investor is an individual or entity that is allowed to trade securities that may not be registered with financial authorities.
- Income: $200k+ annual income (individual) or $300k+ (joint) for the last two years.
- Net Worth: $1 Million+ net worth (excluding primary residence).
- Professional: Holders of Series 7, 65, or 82 licenses.
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