When you’re building the next big thing in the startup world, it’s easy to overlook some crucial regulatory requirements in your quest for success—especially when it comes to fundraising. Securities laws (which apply to any fundraising) tend to be an afterthought for many founders, but this oversight can lead to costly consequences. As legal advisors, we find ourselves repeatedly discussing the importance of compliance with securities laws with our startup clients. This guide seeks to simplify these intricate regulations and offer practical advice for avoiding general solicitation—an area where many founders unknowingly stumble.
Understanding Securities Regulations
Securities laws—which govern fundraising activities—can be incredibly nuanced and encompass both state and federal regulations, making compliance a complex undertaking. The fundamental tenet of these securities regulations is that an issuer (or their agents) cannot offer to sell securities to the public unless the securities are (a) registered or (b) the transaction or securities fall under one of the applicable exemptions. Registering the securities typically involves an initial public offering (IPO) and subsequent registration with the Securities Exchange Commission (SEC), which is very time-consuming, costly, and risky. However, numerous exemptions to registration exist, like the Section 4(a)(2) exemption, which allows for “private placements” not offered to the public. The SEC has continuously stated that one of the hallmarks of a private placement is that there was no “general solicitation” involved in the offering.
Most venture capitalists and private equity firms rely on Regulation D, Rule 506(b), a “safe harbor” that provides certainty that an offering falls within the Section 4(a)(2) “private placement” exemption. While there are other technical requirements, the key aspects of a Rule 506(b) offering are that there is no general solicitation, all securities are sold to accredited investors, and that a Form D is filed with the SEC and applicable state agencies.
What Is General Solicitation?
Despite its significance, general solicitation is ambiguously defined by the SEC. However, most corporate and securities lawyers generally agree that general solicitation encompasses any form of communication aimed at the public to generate interest in an offering of securities. Common examples include:
- Social Media or Internet Posts: Announcements on LinkedIn, X, or the company’s website revealing that your company is in the process of fundraising. As wild as it may sound, the post does not even need to discuss the terms of the offering to be considered a general solicitation.
- Interviews: Mentioning fundraising efforts during interviews with media outlets, even if it seems like an informal remark. If the media outlet publishes the fact the company is fundraising, it would be considered a general solicitation even if the person speaking on behalf of the company didn’t intend for the statement to be published.
- Demo Days: Pitching the company’s fundraising in a public forum without ensuring that all attendees are accredited investors.
Potential Penalties for General Solicitation
Noncompliance with securities regulations, particularly engaging in general solicitation, can have severe consequences:
- Rescission Rights: Investors may have the right to rescind their investment, demanding their money back at any time, which can be financially devastating for a startup.
- Loss of Exemptions for the Company: Engaging in general solicitation can disqualify the offering from using certain exemptions, forcing the company to either register the offering with the SEC, halt the fundraising for a significant period of time (a “cool down” period), or rely on another exemption that limits the amount of money that can be raised and adds significant compliance requirements on both the company and the participating investors. In any case, it becomes a costly and time-consuming process for the company.
- Regulatory Action: The SEC can start an enforcement action against the company and the individuals involved. Even if the action results in a settlement with the SEC, it usually results in imposed fines and other penalties for violations of securities laws, in addition to attorney’s fees and costs of defending the action. In extreme cases, this can include jail time for the individuals involved (see Sam Bankman-Fried and numerous other crypto bros).
- Bad Actor Designations: The most devastating personal penalty is that the individuals involved in an SEC enforcement action could be deemed a “bad actor,” preventing them from being involved in any company that wants to raise money in the future, including being an officer or director of a company conducting a private placement.
- Reputational Damage: Legal issues can tarnish your startup’s reputation, making it harder to attract future investors.
Practical Advice for Founders
So, how can founders raise capital without running afoul of these complex regulations? Here are some practical suggestions:
- Establish a Preexisting Relationship with Investors Before You Ask Them to Invest: You must have a reasonable belief that the investor is accredited in advance of providing any financing terms to establish the relationship as “preexisting.” One way to do this is by asking them to sign an accredited investor questionnaire and/or provide sufficient information to evaluate the investor’s sophistication and financial circumstances. However, if there is sufficient publicly available information to establish the investor is accredited (e.g., the investor is a well-established venture fund or angel investor), you do not need the confirmation or questionnaire. Once you are confident the investor is accredited, you can arrange to schedule an initial meeting and provide them with your pitch deck (see Point 2 below).
- Do Not Include Fundraising Terms in a Pitch Deck: Since the pitch deck is often one of the first introductions an investor has with a company, it would be premature (and presumptuous) to provide them with the terms of your offering. Decks are often passed around between investors and other connectors, especially those that are published on the web. If the fundraising terms are included, a well-circulated deck could stumble its way into a general solicitation.
- Use Networking Platforms Thoughtfully: When using platforms like AngelList, utilize access controls that guarantee only accredited investors can view your proposals. These platforms (if set up properly) require the investors to certify that they are accredited prior to gaining access to the platform, satisfying the preexisting relationship requirement set out above.
- Avoid Press and Public Statements About Fundraising: Steer clear of discussing your offering with the press or during any form of public engagement where attendees are there through a general invitation. Once your round is closed and you’re not expecting any follow-on closings, you may discuss it openly.
- Communicate Carefully at Events: Limit conversations about fundraising at conferences or seminars unless you are certain attendees are accredited investors and have preexisting relationships with the host.
- Control Media Posts and Web Presence: Avoid posting details about your fundraising on social media, in press releases, or on internet forums in general unless they are secured platforms for accredited investors (e.g., AngelList).
- Avoid Hyping the Market: Refrain from making public statements that could be perceived as hyping your company for a fundraising event. Instead, focus on factual information that doesn’t suggest an offering.
Mitigating Risks and Seeking Counsel
The importance of establishing preexisting relationships with investors prior to soliciting offers cannot be overstressed. Ensure that your potential investors meet the accredited investor criteria—over $5 million in assets for entities or a net worth of over $1 million (excluding their primary residence) or high-income thresholds for individuals.
While it’s natural for founders to push boundaries in their quest for innovation and growth, it’s crucial that this does not extend to securities regulations. Consult your legal advisor whenever you’re uncertain, and always ensure your fundraising activities are compliant with the law.
Remember, Perkins Coie is here to help. Stay informed, stay compliant, and may your startup thrive!

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