6 Essential Securities Laws a Startup Founder Should Know Before Raising Capital

Mike Lodzinski
Andrew Kazlow
Published on

If you’re like most business owners, your time is rarely spent reviewing legislation that passed before you were even born. Yet you also realize the importance of understanding the laws and regulations applicable to your business. Failure to comply could have tremendous financial and legal implications.

Ultimately, it is your responsibility as an owner to ensure that the organization is operating within appropriate legal bounds. Given the many intricacies of the U.S. system, you could spend all your time delving into the details– especially when it comes to the highly regulated process of raising capital. Yet your time is the most precious asset you have and would likely be better spent elsewhere. To that effect, we’ve compiled a brief list of the 6 securities laws that every founder should know about before raising capital.

1.      The Securities Act of 1933

2.      Regulation D Private Placement

3.      Regulation D Rule 501: Definition of Accredited Investor

4.      Regulation D Rule 504 and 506

5.      2012 Jobs Act

6.      State Securities Laws

Let’s break down each of these key laws.

1. The Securities Act of 1933

The Securities Act of 1933 is a federal law that regulates the issuance of new securities to the public (initial public offerings or IPOs)and subsequent public offerings (SPOs). Unless a specific exemption or exception applies, this act requires securities issuers to disclose all important information in their registration materials to enable investors to make informed decisions. The act was intended to increase transparency in financial statements and to establish clear restrictions regarding fraudulent activity in securities markets.

2. Regulation D Private Placement

IPOs are expensive. Therefore, Securities and Exchange Commission (SEC) Regulation D (Reg D) is an important exemption from many of the strict registration requirements defined in the Securities Act of 1933. The exemption specifically applies to private placements, which involve the sale of securities to “private” individual investors and institutions instead of to the public market. This allows small companies to raise growth capital through the sale of securities to private investors without needing to fully register with the SEC. It is worth noting that there are still some reporting requirements involved, such as the filing of Form D, and that these securities are still subject to antifraud provisions along with any applicable state regulations.

3. Regulation D Rule 501: Definition of Accredited Investor

What is an accredited investor? You may have heard this term used in reference to an individual investor before, but Reg D Rule 501 actually includes several specific categories, which we list below. This classification is important, as Reg D generally limits participation in private placements to investors who are accredited (though, as usual, there are some exceptions).

Each of the following is considered an accredited investor under Regulation D:

·        Any person with individual income exceeding $200,000 (or $300,000          jointly with a spouse) in each of the two most recent years or having a          net worth of at least $1,000,000 excluding their primary residence.

·        A bank, insurance company, or investment company.

·        A charity, corporation, or partnership with assets above $5,000,000.

·        Other specific types of entities or individuals.

4. Regulation D Rule 504 and 506

There are two primary rules within Reg D that enable companies to take the private placement exemption: Rule 504 and Rule 506 (Rule 505 was phased out in 2016). Rule 504 allows a startup to sell up to $5,000,000in securities within a 12-month period without registration, while Rule 506 allows a company to raise an unlimited amount of capital and is broken into two key subsections – b and c.

Rule 506(b) allows the sale of securities to an unlimited number of accredited investors and up to 35 non-accredited investors assuming they meet certain qualifications and assuming no advertisement is made. Rule506(c), on the other hand, is the more commonly used provision and allows advertisement of the issue if all purchasers are accredited investors and if the issuer takes steps to verify this is the case.

5. 2012 Jobs Act

The Jumpstart Our Business Startups (JOBS) Act was signed into law in April 2012 and was designed to help increase access to capital for small and emerging businesses. It eased regulatory burdens and created new opportunities for startups to raise capital.

One key feature of the act was the creation of a framework for nonaccredited investors (often referred to as retail investors) to invest in startups for the first time. The act created two ways for retail investors to do so: through crowdfunding and through expanded Regulation A stock purchases. Crowd funding is a form of investing whereby companies raise money from many retail investors contributing very small investments (as low as $100). Regulation A is another exemption from registration with the SEC (like Regulation D), and the JOBS act expanded the regulation (often referred to as Reg A+) to allow retail investors to participate (albeit under specific circumstances and limitations).

6. State Securities Laws

While there are many federal regulations to consider, it is also critical for founders and investors to be aware of local state securities laws, known as “blue sky” laws. These laws can vary from state to state but are typically based off of the Uniform Securities Act (USA), which is a model law that was created as a starting point for state regulators to follow.  States also have specific filing and reporting requirements that must be considered when preparing to raise capital to ensure full compliance.


In summary, while there are many rules and regulations for modern business owners to manage, we’ve highlighted 6 of the most important laws to be aware of when preparing to raise capital. By keeping these key laws in mind and by engaging legal counsel early and often, founders can avoid key missteps and ensure they and their investors remain compliant.

About the Author
Mike Lodzinski

Mike started his legal career in 2005 as an Associate in the Corporate & Securities Practice Group of Thompson & Knight LLP. After leaving Thompson & Knight, Mike worked in various in-house roles of increasing responsibility with Toshiba, Hewlett-Packard Enterprise and Hempel, expanding his experience in a variety of industries, including renewable energy, oil and gas, manufacturing, and power generation, among others. Mike is currently General Counsel of Advario North America, a leading provider of storage and logistics solutions in the energy and chemical industry.

In 2009, Mike founded Nighthawk Machinery, a manufacturer and distributor of solid tires and rubber tracks for the construction industry, which was acquired by a competitor in 2018. Since 2018, Mike has invested in several start-ups and early-stage companies and has been active as an advisor in various legal and non-legal capacities. In addition to his role with Advario, Mike is a Partner at Pursuit Legal, a boutique business law firm that provides intelligent legal solutions to SMEs and startups, where he uses his unique skill set to advise a select handful of start-ups and early-stage companies from the idea stage through scale-up.

Mike is a graduate of Texas A&M University and Duke University School of Law.

Andrew Kazlow

Andrew began his professional journey in 2017 as a Sales Engineer at Vinson Process Controls, a premier industrial automation channel for Emerson Electric. In this role, he worked with several Fortune 500 industrial firms to develop, manage, and implement multimillion-dollar B2B automation technology projects. While completing his MBA from 2021 -2022, Andrew served as the managing director for Aggies in Business, a student-run consulting group that supports startups and angel investors. During the Summer of 2022, he enhanced his grasp of CPG operations as a Supply Chain Strategy & Transformation intern at Keurig Dr. Pepper.

In 2022, Andrew founded PitchFact, an investment research service company where he currently serves as CEO and for which he was recognized with the Texas Business Hall of Fame’s Future Texas Business Legend award. PitchFact focuses on making the screening and due diligence process easy for angel networks through premium multi-stage reporting and deal flow access.

Andrew is a two-time graduate of Texas A&M University, where he completed an engineering degree in 2017 and a Master of Business Administration in 2022.

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