Raising private capital can seem straightforward until securities law enters the room. Rule 506(b) and Rule 506(c) can provide valuable pathways for companies seeking investment without registering an offering with the SEC, but each comes with specific requirements.
The difference between a successful capital raise and an expensive legal problem often comes down to decisions made before the first investor receives a pitch, signs a document, or sends a dollar.
Careful planning can help companies choose the appropriate exemption, prepare accurate disclosures, and avoid mistakes that can complicate the offering long after the money arrives.
Mistake #1: Choosing the Exemption After Fundraising Starts
One of the easiest ways to create a securities-law problem is to decide how an offering will be conducted after investor outreach has already begun.
Rule 506(b) and Rule 506(c) are both part of Regulation D, but they operate differently. Rule 506(b) generally prohibits general solicitation, while Rule 506(c) permits general solicitation if all purchasers are accredited investors and the issuer takes reasonable steps to verify that status.
That distinction can affect social media activity, public advertising, investor communications, and how a company builds its prospect list.
For example, a founder planning a 506(b) offering might publicly promote an investment opportunity on LinkedIn or the company's website. What looks like ordinary marketing can raise questions about whether the company has engaged in general solicitation.
A Regulation D attorney in Los Angeles can help evaluate the proposed offering structure and fundraising strategy before investor outreach begins. The exemption should shape the fundraising plan, rather than the fundraising activity forcing the legal strategy to catch up.
Mistake #2: Treating Accredited Investor Status Like a Checkbox
"Are you an accredited investor?" is an important question, but it may not be the entire process.
Rule 506(b) permits sales to accredited investors and, subject to additional requirements, up to 35 non-accredited investors who meet applicable sophistication standards. When non-accredited investors participate, additional disclosure requirements apply.
Rule 506(c) takes a different approach. Every purchaser must be an accredited investor, and the issuer must take reasonable steps to verify that status.
The practical lesson is simple: companies should establish a defensible investor qualification process before closing.
A company relying on Rule 506(c), for example, should not treat an investor's simple representation of accredited status as automatically sufficient. The SEC's verification framework considers the circumstances surrounding the investor, the information available to the issuer, and how the investor was solicited.
Mistake #3: Assuming "Exempt" Means "Disclosure-Free"
An exempt offering is still subject to securities laws, including anti-fraud provisions.
That matters because fundraising materials often begin as a business story. Founders want to explain the market, highlight growth, present projections, and show investors why the opportunity is compelling. Problems arise when enthusiasm turns into an unsupported representation.
Consider a company that tells prospective investors it has secured a major customer when that customer has only expressed preliminary interest. Or a company presenting aggressive projections without adequately explaining the assumptions behind them. Or an issuer discussing a successful investment while omitting a material dispute connected to it.
A private placement memorandum, investor presentation, subscription agreement, financial information, and other communications should be reviewed as part of one disclosure strategy.
A Los Angeles PPM lawyer can help businesses prepare and review offering materials with attention to accuracy, consistency, material risks, and the particular circumstances of the offering.
The objective is not to make an investment opportunity sound less attractive. It is to make sure investors receive an accurate account of what they are actually considering.
Mistake #4: Letting the Cap Table Become a Crime Scene
Investors want to know who owns the company. That sounds obvious until someone asks for the underlying records.
Before launching an offering, companies should review their capitalization history and confirm that it matches what they are presenting to investors. That may include common and preferred equity, options, warrants, convertible notes, SAFEs, founder interests, prior financing rounds, and investor rights.
Many fundraising complications originate in earlier transactions.
Perhaps a founder promised equity to an advisor but never completed the documentation. Perhaps an earlier investor received rights that were overlooked when a new financing structure was developed. Perhaps the company's records do not clearly establish that a previous issuance was properly authorized.
These issues can become particularly uncomfortable during investor diligence.
A trusted LA corporate law firm can assist with reviewing organizational records, prior equity issuances, approvals, governance documents, and other corporate matters that form the legal foundation for a new financing.
Cleaning up the records before fundraising is generally preferable to explaining the problem to a prospective investor with a diligence deadline approaching.
Mistake #5: Forgetting Form D and State Notice Filings
Closing the financing does not necessarily mean every filing obligation has disappeared.
Issuers relying on Regulation D, including Rule 506(b) and Rule 506(c), generally must file Form D with the SEC within 15 days after the first sale of securities. States may also require notice filings and fees even though Rule 506 offerings receive federal preemption from state registration and qualification requirements.
That timing deserves attention because the first sale may occur before the company considers the financing "closed."
A well-organized compliance calendar can help prevent a technically successful financing from acquiring an avoidable regulatory issue immediately afterward.
Mistake #6: Failing to Investigate the People Behind the Offering
A securities compliance review should not stop with the company itself.
Rule 506 contains "bad actor" disqualification provisions that can prevent an issuer from relying on the exemption when certain covered persons have experienced specified criminal convictions, regulatory orders, court orders, or other disqualifying events.
Before launching an offering, companies should consider the backgrounds of relevant people involved in the transaction.
- Identify Covered Persons: Review directors, officers, significant owners, promoters, and other individuals or entities whose conduct may be relevant under the applicable rules.
- Investigate Before Launch: Conduct the appropriate inquiry before securities are offered rather than waiting for investor diligence to raise the issue.
- Document the Review: Maintain records showing what was reviewed and what information was considered when evaluating potential disqualification.
- Address Problems Early: A historical regulatory matter does not automatically mean a financing must stop. The applicable rules contain provisions concerning disqualification, disclosure, and reasonable-care considerations.
A securities enforcement lawyer in LA can help assess potential regulatory exposure when a company identifies an enforcement history or another concern involving someone connected to the offering.
Mistake #7: Treating Investor Communications as Separate From the Offering
A company can have carefully prepared formal documents and still create problems through informal communications.
Founders communicate with investors through email, presentations, video calls, social media, data rooms, and other channels. Those communications can collectively shape an investor's understanding of the opportunity.
That creates a consistency problem.
If formal offering documents identify a material risk that never appears in the pitch materials, or if the pitch deck contains a claim that the formal documents do not support, the company may create an unnecessary gap between its legal disclosures and fundraising narrative.
Companies should establish clear communication practices before the offering begins. Founders, employees, placement agents, and other participants should understand what information is being presented and where investors should obtain definitive information.
Mistake #8: Assuming Compliance Ends When the Money Arrives
The wire transfer may feel like the finish line. Legally, it may be closer to halftime.
Companies can have continuing responsibilities involving investor communications, records, governance, representations, use of proceeds, amendments, future securities offerings, and other matters depending on the transaction.
Earlier compliance issues can also resurface during a later financing. Prospective investors may request representations about prior securities-law compliance and supporting documentation as part of their diligence.
Two areas deserve particular attention after closing:
- Maintain the Record: Preserve offering documents, investor qualification materials, communications, filings, consents, and other records supporting the transaction.
Monitor Future Activity: A later financing, ownership change, new solicitation, or material development can create additional legal considerations that should be evaluated before action is taken.
Build the Compliance Strategy Before the Investor List
A Rule 506 offering can provide an effective path to private capital, but the exemption itself does not eliminate the need for careful securities-law planning. Exemption selection, investor qualification, disclosure, corporate records, filings, bad-actor diligence, and continuing compliance can all affect whether an offering proceeds as intended.
For companies preparing a financing, a capital raise lawyer in Los Angeles can help identify legal issues before they become investor objections or regulatory problems. A corporate transactional lawyer may also help coordinate the financing with the company's broader ownership structure, governance, and commercial objectives.
The strongest private offerings tend to have one thing in common: the legal work begins before the fundraising begins. Careful preparation can give companies a stronger foundation for raising capital while reducing the risk of preventable securities-law problems.
About the Author
This blog was written by a securities law professional who advises businesses and investors on private offerings, securities compliance, capital formation, and related transactions. The author works at Alex Nahai Law, a California law firm advising businesses, investors, and individuals on corporate, securities, transactional, and business matters. They can be contacted here.
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