The Hedge | Brutal Honesty Over Hype Since 2008
Most California entrepreneurs who need outside capital don’t qualify for institutional venture capital and aren’t ready for a public offering. The middle ground — raising money from private investors through exempt offerings — has specific federal and California securities law requirements that determine what you can do, to whom, and with what disclosures. Getting this wrong creates personal liability that survives the company.
Federal Exemptions: Regulation D
The most commonly used federal exemption for private capital raises is Regulation D, Rules 504, 506(b), and 506(c). Rule 506(b) allows raising unlimited capital from up to 35 non-accredited investors (with significant disclosure requirements) and unlimited accredited investors — but prohibits general solicitation. Rule 506(c) allows general solicitation and advertising but limits investors to verified accredited investors only. For most California entrepreneurs doing a friends-and-family raise or a small angel round, Rule 506(b) is the typical starting point. The exemption must be claimed by filing a Form D with the SEC within 15 days of the first sale.
California’s Blue Sky Requirements
Federal exemption from SEC registration does not exempt the offering from California securities law — you must separately comply with California’s corporate securities laws. California permits use of federal 506(b) and 506(c) exemptions with a notice filing to the Department of Financial Protection and Innovation (DFPI) and the required fee. California’s “merit review” authority — which historically allowed the DFPI to deny offerings deemed unfair to investors regardless of disclosure adequacy — has been narrowed by federal preemption for 506 offerings, but California can still impose specific disclosure requirements for intrastate offerings.
The Accredited Investor Definition
Accredited investors — those who can participate in most private offerings without the full disclosure package required for non-accredited investors — are defined by SEC rules. Individual accredited investors include: those with income over $200,000 ($300,000 joint) in each of the past two years with expectation of the same in the current year; those with net worth over $1 million excluding primary residence; and certain professional credentials (licensed Series 7, 65, or 82 holders). For venture capital and angel capital raises, understanding who qualifies as accredited before you approach them prevents technical violations that create securities law exposure.
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