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  • Writer's pictureLindsay Spiller

Raising Capital Legally: Navigating the Minefield of Securities Law for Startups

Updated: Dec 31

A founder being showered by dollar bills from investors for his startup company


In the ambitious world of startups, raising capital is a rite of passage. Every entrepreneur dreams of scaling up, and funding often serves as the rocket fuel for that journey. However, treading the path of capital raising without understanding securities laws is akin to navigating a minefield blindfolded. For startups, especially those unfamiliar with legal intricacies, these laws can seem daunting. This article sheds light on this crucial area, elucidating potential pitfalls and emphasizing the rewards of compliance.

1. Understanding the Basics of Securities Law

What exactly constitutes a security? It broadly includes investment contracts, stocks, bonds, or any other financial instruments that represent an investment in a business and are expected to yield profits. The heart of securities regulation in the U.S. is the Securities and Exchange Commission (SEC), established to protect investors, maintain fair and efficient markets, and facilitate capital formation.

2. Registration Requirements and Exemptions

The Securities Act of 1933, often termed as the "truth in securities" law, mandates companies to provide financial and other pertinent information about securities being offered for public sale. This ensures potential investors receive comprehensive information.

However, not all securities offerings need to be registered. Startups commonly leverage:

  • Regulation D: Offers various exemptions based on the amount being raised and the type of investor involved.

  • Regulation A: Known as a "mini-IPO", it has fewer reporting requirements.

  • Regulation CF (Crowdfunding): Allows raising capital via crowdfunding platforms.

While these exemptions provide flexibility, they come with their own set of requirements. Overstepping these bounds can lead to severe repercussions.

3. The Legality of Using Finders in Fundraising

Finders are individuals who assist companies in finding potential investors in exchange for a fee. Their role sounds straightforward, but it's mired in regulatory ambiguity. While they can connect startups with investors, they cannot negotiate or advise either party, lest they tread into the territory of "broker" activity, requiring special registration. The unregistered activity could lead to penalties, rescission rights for investors, or even criminal charges. Each State treats the issue of Finders differently so it's best to consult with a lawyer before you engage a Finder.

4. Common Securities Law Pitfalls for Newbies

  • Mistake 1: Not disclosing critical information. Transparency is non-negotiable. Withholding or misrepresenting material information can lead to fraud charges.

  • Mistake 2: Misusing fundraising exemptions. Not all exemptions are created equal; using the wrong one can lead to forced return of investments.

  • Mistake 3: Overlooking state securities laws, or Blue Sky Laws. While the federal law often takes precedence, state regulations can't be ignored.

  • Mistake 4: Unintended general solicitation. Startups need to be wary of how they publicize their fundraising, as certain public solicitations can nullify specific exemptions.

  • Mistake 5: Not meeting reporting requirements. This can lead to lost exemptions or hefty fines.

5. Seeking Legal Advice: Why It's Imperative for Startups

Startups, enthusiastic about their growth, sometimes view legalities as secondary. This perspective is perilous. Companies like Theranos and its infamous fall from grace serve as stark reminders of the consequences of sidestepping legal mandates. Having a knowledgeable attorney can be the difference between sustained growth and crippling lawsuits.

6. Preparing for Due Diligence: Getting Your House in Order

Due diligence is the investor's method to assess the viability and legality of their potential investment. Startups should:

  • Maintain organized financial records.

  • Have a clear cap table.

  • Ensure all IP rights and employee contracts are well-documented.

Being prepared not only streamlines the investment process but also showcases the company’s professionalism.

7. Looking Beyond Compliance: Building Trust with Potential Investors

Adhering to laws isn't just about avoiding penalties; it's about building trust. Investors are more likely to fund startups that exhibit transparency, adherence to regulations, and a clear vision. Building a relationship rooted in trust and credibility is paramount for long-term success.


Raising capital, while exciting, is rife with legal complexities. Startups must prioritize understanding and adhering to securities laws. With proactive legal preparation, due diligence, and a focus on building trust, startups can ensure their fundraising endeavors are both successful and compliant.

Are you a startup looking to navigate the intricacies of securities law? Seek expert legal consultation and immerse yourself in resources to ensure you’re well-equipped for your fundraising journey. Remember, in the world of startups, knowledge is more than power; it’s protection.

Spiller Law is an advisor to startup businesses, entertainment and media companies, and artists. Feel free to schedule a free consultation.


Spiller Law is a San Francisco business, entertainment, and estate planning law firm. We serve clients in the San Francisco Bay Area, Silicon Valley, Los Angeles, and California. Feel free to arrange a free consultation using the Schedule Appointment link on our website. For other questions, call our offices at 415-991-7298.


The information provided in this article is for general informational purposes only and should not be construed as legal advice or opinion. Readers are advised to consult with their legal counsel for specific advice.


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