The securities law question small businesses don’t know to ask until it’s too late

Most entrepreneurs know you need a business license. Far fewer know that raising money from friends, family, or even customers crosses into federal securities law — and that the consequences of getting it wrong are serious.

Here's the basic rule: anytime you sell an ownership interest, a share of profits, or anything that looks like an investment return to someone in exchange for money, you've likely sold a security. This applies to LLCs, corporations, and even certain informal arrangements. The Securities Act of 1933 requires that securities offerings are either registered with the SEC (enormously expensive and complex) or qualify for an exemption.

The exemptions most small businesses should know about

Regulation D, Rule 506(b) is the most common path for small businesses raising money privately. It allows you to raise an unlimited amount from "accredited investors" (people who meet income or net worth thresholds) and up to 35 sophisticated non-accredited investors, with no SEC registration required. You do have to file a Form D with the SEC within 15 days of the first sale — that's a simple notice filing, not a full registration.

Rule 504 allows raises up to $10M from any investors (not just accredited) under certain conditions, with some state-level registration requirements depending on where investors are located.

Regulation Crowdfunding (Reg CF) allows raises up to $5M from the general public through an approved crowdfunding platform. It has specific ongoing disclosure requirements.

The part that catches people off guard

Securities exemptions have very specific requirements. Using "general solicitation" (advertising, social media posts, public pitches) usually disqualifies you from Rule 506(b). You have to file paperwork in each state where investors are located under "blue sky" laws — just filing with the SEC isn't enough. And certain investor suitability requirements exist that the company is responsible for verifying.

The consequence of an unregistered offering that doesn't fit an exemption is that investors can demand their money back, with interest, for up to a year after the sale. Plus regulatory action.

I'm not trying to scare anyone — these rules are navigable and most legitimate small business raises can be structured to comply. But the time to understand this is before you take the first dollar, not after.

What questions do you have about raising money for your business?

This is general information only, not legal advice. No attorney-client relationship is formed by this comment. Consult a licensed attorney for advice specific to your situation.