The Capital Raise Challenge
When I raise capital for my trading platform, I'm navigating one of the most regulated areas of finance: securities law. Every dollar I accept from investors triggers potential compliance obligations under federal and state securities laws.
This playbook walks through my options, from traditional Reg D private placements to newer crowdfunding approaches, with specific considerations for trading and fintech startups.
⚠ Securities Law Applies to Almost Everything
Whether I'm selling equity, issuing SAFEs, raising with tokens, or even accepting "investments" informally from friends and family, securities laws likely apply. The consequences of getting this wrong include rescission rights, SEC enforcement, and personal liability.
Regulation D Exemptions
Regulation D is my most common path for raising capital from private investors. It provides exemptions from SEC registration, but I still must comply with specific requirements.
🔒 Rule 506(b) - No General Solicitation
- Investors: Unlimited accredited + up to 35 sophisticated
- Marketing: No public advertising allowed
- Verification: Self-certification accepted
- Disclosure: Extensive if non-accredited participate
- State Filing: Notice filing in each investor state
- Timeline: Can close quickly
- Cost: $15K - $50K legal
📣 Rule 506(c) - General Solicitation Allowed
- Investors: Accredited investors only
- Marketing: Public advertising permitted
- Verification: Must take "reasonable steps" to verify
- Disclosure: No specific requirements
- State Filing: Notice filing in each investor state
- Timeline: Can close quickly
- Cost: $20K - $60K legal + verification costs
506(b) vs 506(c): My Decision
| Factor | 506(b) | 506(c) |
|---|---|---|
| Can I advertise? | No - rely on existing relationships | Yes - AngelList, Twitter, LinkedIn |
| Non-accredited investors? | Up to 35 sophisticated investors | Not permitted |
| Verification burden | Self-certification acceptable | Must verify (tax returns, letters, etc.) |
| Best for | Friends/family, warm network | Broad outreach, online fundraising |
| Typical raise | $500K - $5M | $1M - $20M+ |
💡 Accredited Investor Verification (506c)
I must take "reasonable steps" to verify accredited status. Acceptable methods include: reviewing tax returns (for income test), obtaining bank/brokerage statements (for net worth test), getting written confirmation from attorney/CPA/broker-dealer, or using a third-party verification service like VerifyInvestor or Parallel Markets.
SAFEs and Convertible Notes
SAFEs (Simple Agreements for Future Equity) and convertible notes are popular for early-stage raises. But they're still securities requiring compliance.
SAFE Considerations
- Securities status: SAFEs are securities under federal law - I can't avoid Reg D by using a SAFE
- Valuation cap: Sets the maximum price at which my SAFE converts to equity
- Discount: Typically 10-20% discount to next round price
- Pro-rata rights: Some SAFEs include rights to invest in future rounds
- MFN provision: Protects early SAFE holders if I offer better terms later
Convertible Note Considerations
- Debt instrument: Creates actual debt obligation with interest
- Maturity date: Must repay or convert by specified date
- Interest rate: Typically 4-8% (accrues, doesn't pay out)
- Conversion triggers: Usually next equity round above threshold
- Blue sky: Some states treat notes differently than equity for filing purposes
⚠ The "Friends and Family" Trap
I can't avoid securities law by calling something a "loan" from friends or family. If repayment depends on my business success, or if there's any equity kicker, it's likely a security. Many founders learn this the hard way when they can't close a priced round due to messy cap table issues from informal early "investments."
Token Fundraising and Securities Law
If my trading platform involves tokens or crypto, I need to carefully consider securities implications.
The Howey Test for Tokens
A token is likely a security if there's:
- Investment of money - Almost always met
- Common enterprise - Pooled investor funds, usually met
- Expectation of profits - Token value appreciation counts
- From efforts of others - My team building the platform
⚠ Most Token Sales Are Securities Offerings
The SEC has been very clear: most ICOs and token sales are unregistered securities offerings. The "utility token" argument has largely failed. If I'm selling tokens to raise capital, I should assume securities laws apply.
Compliant Token Paths
| Approach | Description | Considerations |
|---|---|---|
| Reg D Token Sale | Sell tokens to accredited investors under 506(b) or 506(c) | One year holding period, transfer restrictions |
| Reg S Offshore | Sell to non-US persons offshore | Complex flowback rules, can't market to US |
| Reg A+ Token Offering | Registered offering up to $75M | Expensive, long timeline, SEC qualification required |
| Sufficiently Decentralized | Token may not be a security if network is truly decentralized | Very high bar, uncertain standard, not available at launch |
Crowdfunding Options
Regulation Crowdfunding (Reg CF) and Regulation A+ offer paths to raise from non-accredited investors.
👥 Regulation CF (Crowdfunding)
- Max Raise: $5M per year
- Investors: Anyone (with limits based on income/net worth)
- Platform: Must use registered funding portal
- Disclosure: Form C filing, financial statements
- Ongoing: Annual report requirement
- Timeline: 2-4 months to launch
- Cost: $10K - $50K + platform fees (5-8%)
📈 Regulation A+ (Mini-IPO)
- Max Raise: Tier 1: $20M / Tier 2: $75M per year
- Investors: Anyone (Tier 2 has investment limits)
- Platform: Any method, no portal required
- Disclosure: SEC qualification, offering circular
- Ongoing: Tier 2 requires ongoing SEC reporting
- Timeline: 6-12 months
- Cost: $100K - $300K+
Reg CF Investment Limits
| Investor Profile | Annual Investment Limit |
|---|---|
| Income AND net worth both under $124K | Greater of $2,500 or 5% of lesser of income/net worth |
| Income OR net worth at least $124K | 10% of lesser of income/net worth (max $124K) |
✅ Reg CF Advantages for Trading Platforms
Reg CF can be strategic for trading platforms because I can raise capital while simultaneously building a community of invested users. Platforms like Wefunder, Republic, and StartEngine specialize in fintech/trading company raises.
State Blue Sky Compliance
Federal exemptions don't eliminate state-level securities law compliance. I must still address "blue sky" laws in each state where I have investors.
State Filing Requirements by Exemption
| Exemption | State Requirements | Timing |
|---|---|---|
| 506(b) / 506(c) | Notice filing (Form D) in each investor state | Within 15 days of first sale in state |
| Reg CF | Preempted - no state filing required | N/A |
| Reg A+ Tier 2 | Preempted - no state filing required | N/A |
| Reg A+ Tier 1 | Must register or find exemption in each state | Before any sales in state |
⚠ New York, Texas, and Other Problem States
Some states have additional requirements beyond federal filings. New York has historically been strict, and Texas requires a specific filing for 506 offerings. California has its own rules for offerings to California residents. Budget extra time and legal costs for multi-state compliance.
Avoiding Investment Company (40 Act) Issues
If my trading platform pools investor capital to trade securities, I may inadvertently become an "investment company" under the Investment Company Act of 1940 - requiring registration or finding an exemption.
When 40 Act Applies
- Pooled capital: I'm holding or managing investor funds together
- Investing in securities: The pooled capital is invested in securities
- 40% asset test: More than 40% of my assets are investment securities
Common Exemptions
| Exemption | Requirements | Best For |
|---|---|---|
| 3(c)(1) | Max 100 beneficial owners, no public offering | Small hedge funds, early-stage pools |
| 3(c)(7) | Unlimited "qualified purchasers" only | Larger funds with wealthy investors |
| Operating Company | Business operations beyond just investing | Trading platforms with substantial tech/ops |
⚠ The Copy Trading Trap
If my platform lets users invest in a "strategy" or "pool" that I or signal providers control, I may have inadvertently created an investment company. This is separate from RIA registration - I may need both RIA status AND a 40 Act exemption.
Accredited vs Non-Accredited Investors
Who can invest in my offering depends heavily on accredited investor status.
Accredited Investor Definition (Current)
- Income test: $200K individual / $300K joint income in last 2 years, expect same this year
- Net worth test: $1M+ net worth (excluding primary residence)
- Professional credentials: Series 7, 65, or 82 license holders
- Knowledgeable employees: Of private funds they're investing in
- Entities: $5M+ assets, or all equity owners are accredited
- Family offices: $5M+ AUM with sophisticated investment management
Impact on My Raise
| If I want to include... | My options are... |
|---|---|
| Only accredited investors | 506(b), 506(c), Reg A+, Reg CF |
| Non-accredited investors | 506(b) (up to 35 sophisticated), Reg CF, Reg A+ |
| Public advertising | 506(c) (accredited only), Reg CF, Reg A+ |
Integration Doctrine
The SEC may "integrate" multiple offerings and treat them as one, potentially breaking my exemption if the combined offering wouldn't qualify.
Integration Safe Harbors
- 30-day safe harbor: Offerings more than 30 days apart are presumptively not integrated (for most Reg D offerings)
- Different exemptions: Offerings under different exemptions generally don't integrate
- Reg CF/Reg A+ protected: These generally don't integrate with other offerings
💡 Planning Multiple Raises
If I'm planning a SAFE round now and a priced round later, I should structure them carefully. Different terms, different investor bases, and adequate time separation help avoid integration issues. Most importantly, I should document my intent to conduct separate offerings from the start.
Bad Actor Disqualification
Certain "bad actors" associated with my offering can disqualify me from using Rule 506 exemptions.
Covered Persons
- The issuer (my company)
- Directors, officers, general partners
- 20%+ equity holders
- Promoters connected to the offering
- Investment managers and their principals
- Anyone compensated for investor solicitation
Disqualifying Events
- Criminal convictions (securities, financial fraud, etc.)
- Court injunctions/restraining orders (securities-related)
- SEC disciplinary orders
- SEC cease-and-desist orders
- Suspension/expulsion from SRO membership
- SEC stop orders on registration statements
- USPS fraud orders
⚠ Due Diligence Required
I must conduct reasonable inquiry into whether any covered person has disqualifying events. "I didn't know" isn't a defense. My legal counsel should include bad actor questionnaires as part of the offering process.
Practical Timeline and Costs
Comparison by Exemption
| Exemption | Timeline to First Close | Legal Cost | Total First-Year Cost |
|---|---|---|---|
| 506(b) SAFE | 2-4 weeks | $5K - $15K | $8K - $25K |
| 506(b) Priced | 4-8 weeks | $15K - $40K | $20K - $60K |
| 506(c) Priced | 4-8 weeks | $20K - $50K | $30K - $80K |
| Reg CF | 2-4 months | $10K - $30K | $30K - $100K (incl. platform fees) |
| Reg A+ Tier 2 | 6-12 months | $100K - $200K | $150K - $400K |
My Fundraising Checklist
- Determine exemption: Based on investor types, amounts, and marketing needs
- Engage securities counsel: Before accepting any investment
- Prepare offering documents: PPM, subscription agreement, operating agreement
- Bad actor check: Questionnaires for all covered persons
- Investor qualification: Accreditation verification if needed
- Close and document: Proper execution, funds receipt, cap table update
- File Form D: Within 15 days of first sale
- State filings: Blue sky compliance in investor states
- Ongoing compliance: Investor communications, annual reports if required
Which Path Is Right for My Raise?
The best exemption depends on how much I'm raising, who I'm raising from, and whether I want to advertise publicly. Use the workbench to model my specific scenario.
✅ My Recommended Approach
For most early-stage trading platforms, I recommend starting with a 506(b) SAFE round from my network, then graduating to a 506(c) priced round or Reg CF when I need broader reach. Save Reg A+ for later-stage raises where I want trading liquidity for my securities.