SmallBiz Essentials: What Pathways Are Available to Raise Capital From Investors?

Welcome to the SEC Small Business Advocacy Office’s blog where we share some fundamental capital-raising concepts.

Unlike some funding alternatives, like a loan or a grant, raising capital from investors involves offering and selling securities. A company may not offer or sell securities unless the offering has been registered with the SEC (think IPO) or falls within an exemption from registration. If your company is considering raising capital, it may be helpful to explore the various pathways available under the federal securities laws.

Exempt Offerings

Smaller, early-stage companies often rely on offerings conducted pursuant to an exemption from registration—known as exempt offerings—to raise capital from investors. There are multiple exemptions available.

Section 4(a)(2) of the Securities Act: the “Private Placement” Exemption

Section 4(a)(2) of the Securities Act exempts from registration transactions by an issuer not involving any public offering. To qualify for this exemption, which is sometimes referred to as the “private placement” exemption, the purchasers of the securities must:

• either have enough knowledge and experience in finance and business matters to be “sophisticated investors” (able to evaluate the risks and merits of the investment), or be able to bear the investment’s economic risk,
• have access to the type of information normally provided in a prospectus for a registered securities offering, and
• agree not to resell or distribute the securities to the public.

In general, public advertising of the offering and general solicitation of investors are incompatible with the private placement exemption. Section 4(a)(2) is a statutory exemption whose precise limits are not defined by SEC rules. Instead, the market’s understanding of the exemption is based on court cases interpreting the statute.

Regulation D: Rule 506(b)—the “Private Placement” safe harbor

Rule 506(b) of Regulation D is considered a “safe harbor” under Section 4(a)(2)—it provides objective standards that a company can rely on to meet the requirements of the Section 4(a)(2) exemption. Under Rule 506(b):

• Companies may raise an unlimited amount of capital primarily from investors that the company reasonably believes are Accredited Investors.
  • For individuals, this means that they meet certain wealth or income thresholds or have certain professional credentials.
  • For entities, there are other standards they can meet to qualify as accredited investors.
• Up to 35 non-accredited investors may participate, but additional requirements apply.
• The company may not use general solicitation, which includes any general advertisement or solicitation that conditions the market for an offering of securities. To avoid general solicitation, the company can conduct an offering that is limited to investors with whom it (or its broker dealer or investment adviser) has a pre-existing, substantive relationship.
• The company is required to file a notice on Form D with the SEC within 15 days after the first sale of securities in the offering. 
• Investors receive “restricted securities,” which means that there are restrictions on when and how investors can resell their securities.
• “Bad actor” disqualification provisions apply.

Regulation D: Rule 506(c) General Solicitation Offerings

Rule 506(c) is an exemption from registration that a company can rely on to conduct an offering in accordance with Section 4(a)(2). Under Rule 506(c):

• Companies may raise an unlimited amount of capital from Accredited Investors.
• The company may use general solicitation to solicit investors.
• The company must take reasonable steps to verify purchasers’ accredited investor status, which may involve the company taking certain affirmative measures beyond those required to support a reasonable belief required under Rule 506(b) (for example, reviewing federal tax returns and obtaining written representations from the purchaser).
• Like in a 506(b) offering,
  • companies must file a Form D with the SEC within 15 days after the first sale,
  • investors receive restricted securities, and
  • “Bad actor” disqualification provisions apply.

Regulation D: Rule 504 Limited Offerings

Rule 504 offerings are often called “Limited Offerings.” Under Rule 504:

• Companies may raise up to $10 million in a rolling 12-month period.
• General solicitation and advertising are generally prohibited.
• Like in 506(b) and (c) offerings, companies must file a Form D with the SEC within 15 days after the first sale.
• Except in limited circumstances, investors receive restricted securities.
• Certain companies may not use this exemption:
  • SEC reporting companies (often called public companies),
  • Investment companies (e.g., mutual funds, ETFs),
  • Companies with no business plan or whose business plan is to merge with or buy an unidentified company, and
  • Companies disqualified under applicable “bad actor” provisions.  
• Unlike Rules 506(b) and 506(c), offerings under Rule 504 must also comply with state registration and qualification requirements or qualify for an exemption from such state requirements.

Regulation Crowdfunding Offerings

Regulation Crowdfunding Offerings allow eligible companies to raise up to $5 million in a rolling 12-month period from investors online. Under Regulation Crowdfunding:

• Each offering must be conducted exclusively through one online platform operated by a broker-dealer or a funding portal that is registered with the SEC and FINRA.
• Issuers must file an offering statement on Form C with the SEC containing operating and financial disclosures. Disclosure requirements vary depending on the size of the offering and other factors.
• Certain companies are not eligible to use this exemption:
  • Non-U.S. companies,
  • SEC reporting companies,
  • Certain investment companies,
  • Companies disqualified under applicable “bad actor” provisions
  • Companies that have failed to comply with the annual reporting requirements under Regulation Crowdfunding during the two years immediately preceding the filing of the offering statement, and
  • Companies that have no specific business plan or have indicated their business plan is to engage in a merger or acquisition with an unidentified company or companies.
• Non-accredited investors are limited in the amount they can invest in all Regulation Crowdfunding offerings in a rolling 12-month period:
  • If either their annual income or their net worth is less than $124,000, the investor’s limit is the greater of (1) $2,500; or (2) 5% of the greater of the investor’s annual income or net worth.
  • If both their annual income and their net worth are $124,000 or more, the investor’s limit is 10% of the greater of their annual income or net worth.
  • A non-accredited investor’s total investment in all Regulation Crowdfunding offerings is limited to $124,000, regardless of annual income or net worth.

In November 2024, staff issued updated guidance on Regulation Crowdfunding.

Intrastate Offerings

Section 3(a)(11) of the Securities Act

Section 3(a)(11) of the Securities Act is generally known as the “intrastate offering exemption.” This exemption seeks to facilitate the financing of local business operations. Intrastate Offerings allow companies to raise capital within a single state according to state law. To qualify for the exemption, a company must:

• be organized in the state where it is offering the securities,
• carry out a significant amount of its business in that state, and
• make offers and sales only to residents of that state.

Many states limit the number of offerees and purchasers and the size of the offering to between $1 million to $5 million in a 12-month period.

Staff recently issued updated guidance on intrastate offerings.

Rule 147

Rule 147 is considered a “safe harbor” under Section 3(a)(11). Under Rule 147, the company must:

• be organized in the state where it offers and sells securities,
• have its “principal place of business” in-state and satisfy at least one “doing business” requirement that demonstrates the in-state nature of the company’s business,
• limit offers and sales of securities to in-state residents or persons who the company reasonably believes are in-state residents, and
• obtain a written representation from each purchaser providing the residency of that purchaser.

There are resale limitations on securities purchased in these offerings.

Rule 147A

Rule 147A is similar to Rule 147 except that Rule 147A:

• allows offers to be accessible to out-of-state residents, so long as the company only sells to in-state residents, and
• permits a company to be incorporated or organized out-of-state, so long as the company has its “principal place of business” in-state and satisfies at least one “doing business” requirement that demonstrates the in-state nature of the company’s business.

Regulation A Offerings

Regulation A Offerings allow eligible companies to raise capital through a process similar to, but less extensive than, a registered offering.

Regulation A has two offering tiers:

• Tier 1, for offerings of up to $20 million in a rolling 12-month period, and
• Tier 2, for offerings of up to $75 million in a rolling 12-month period.

For offerings of up to $20 million, companies can choose either Tier 1 or Tier 2.

There are certain requirements applicable to both Tier 1 and Tier 2 offerings, including:

• company eligibility requirements, 
• “bad actor” disqualification provisions,
• disclosure requirements, and
• other matters.

Additional requirements apply to Tier 2 offerings, including:

• limitations on the amount of money a non-accredited investor may invest in the offering,
• requirements for audited financial statements, and
• ongoing reporting obligations.

In addition, companies conducting Tier 2 offerings are not required to register or qualify those offerings with state securities regulators.

Staff recently issued updated guidance on Regulation A.

Registered Public Offerings

Registered public offerings generally refer to offers and sales of securities that have been registered under the Securities Act. Companies must file a registration statement and may not sell the securities until the registration statement filed with the SEC is effective.

Initial Public Offerings (IPOs) provide an initial pathway for companies to raise unlimited capital from the general public through a registered offering. After its IPO, the company will be a public company with ongoing public reporting requirements.

Reporting companies can use Registered Offerings to raise unlimited capital through follow-on offerings using a registration statement filed with the SEC.

Reporting companies can also use Registered Offerings to provide liquidity to their shareholders via secondary offerings.

This resource represents the views of the staff of the Office of the Advocate for Small Business Capital Formation. It is not a rule, regulation, or statement of the Securities and Exchange Commission (“Commission”).  The Commission has neither approved nor disapproved its content. This resource, like all staff statements, has no legal force or effect: it does not alter or amend applicable law, and it creates no new or additional obligations for any person. This resource does not provide legal advice. 

Have suggestions on additional educational resources? Email smallbusiness@sec.gov.