Registration is the default
Under Section 5 of the Securities Act of 1933, every offer and sale of a security must be registered — unless a specific exemption applies. A public IPO is the registered path; it is slow and expensive.
Founder & Sponsor Primer · Private Capital
Raising private capital, explained before you ask.
Most first conversations about a private raise cover the same ground: What exemption do I use? Can I advertise? Who counts as an accredited investor — and how do I verify it? This page answers that first wave in plain English, so you arrive at the table already fluent.
Educational overview · Not legal advice · Current as of June 2026
The Foundation
What a "private offering" actually is
Selling a stake in your company or fund is selling a security. Federal law requires every securities sale to be either registered with the SEC or sold under an exemption. Private offerings live in the exemption.
Regulation D is the exemption
Most startups and funds raise privately under Regulation D — a set of safe harbors built on the Section 4(a)(2) private-placement exemption. Rules 504, 506(b) and 506(c) are the workhorses.
Accredited investors are the audience
Reg D offerings are built around accredited investors — individuals and entities the SEC presumes can fend for themselves financially. Who qualifies, and how you confirm it, drives the whole structure.
The one-sentence version: A private offering is a sale of securities to a defined, mostly-accredited audience, done under a Regulation D exemption instead of a full SEC registration — with rules about who you can talk to, what you must disclose, and how you confirm each investor's status.
Choosing a Path
Rule 506(b) vs. Rule 506(c)
Roughly 90% of Regulation D capital is raised under Rule 506. The choice between its two flavors turns on one question: do you need to advertise?
| Question | Rule 506(b) | Rule 506(c) |
|---|---|---|
| General solicitation? | No. No public advertising, demo-day pitches to strangers, or open marketing. | Yes. You may advertise the raise publicly — website, social, conferences. |
| Who can invest? | Unlimited accredited investors + up to 35 sophisticated non-accredited investors. | Accredited investors only. No non-accredited purchasers permitted. |
| Verifying accreditation | Self-certification is generally acceptable — a checked box and representation, absent red flags. | Issuer must take reasonable steps to verify each purchaser is accredited. |
| Pre-existing relationship | Effectively required — you raise from people you already know. | Not required. You can market to people you've never met. |
| Best for | Friends-and-family rounds, relationship-driven funds, founders who don't want to advertise. | Sponsors who want to market openly and are willing to verify every investor. |
The trade-off in a line: 506(b) keeps verification light but forbids advertising. 506(c) lets you advertise freely but requires you to actively verify every investor's accredited status. You cannot have public marketing and self-certification.
The Definition
Who counts as an accredited investor
Set by Rule 501(a) of Regulation D. An investor qualifies through any one of these pathways — there is no government registry or card; status is confirmed at the point of each investment.
The income test
$200,000 in each of the last two years individually ($300,000 jointly with a spouse), with a reasonable expectation of the same this year.
The net-worth test
Net worth over $1 million, alone or with a spouse — excluding the value of a primary residence.
Professional licenses
Holders of an active Series 7, Series 65, or Series 82 license qualify regardless of income or net worth (added in the 2020 amendments).
Knowledgeable employees
"Knowledgeable employees" of a private fund qualify with respect to that fund — directors, executive officers, and certain investment personnel.
Qualifying entities
Entities with over $5 million in assets, entities owned entirely by accredited investors, and certain registered advisers, banks, and institutions.
The definition keeps expanding
The SEC has signaled further expansion — likely additional professional certifications. Any update layers on top of these pathways rather than replacing them.
Doing It Right
How verification works under 506(c)
"Reasonable steps to verify" is a flexible, facts-and-circumstances standard. The SEC has named non-exclusive safe-harbor methods you can rely on.
Income documentation
Review the purchaser's IRS forms (W-2s, 1099s, or tax returns) for the two most recent years, plus a written representation of expected income for the current year.
Asset documentation
Review bank, brokerage, or appraisal statements (dated within 90 days) confirming assets, paired with a consumer credit report to confirm liabilities — establishing net worth.
Third-party verification letter
Obtain a written confirmation from a registered broker-dealer, SEC-registered investment adviser, licensed attorney, or CPA. This is the most common method on modern platforms.
High-minimum-investment pathway (2026)
Under recent SEC guidance, an offering with a high minimum — $200,000 for a person or $1 million for an entity, paid without third-party financing — plus written representations can satisfy the standard.
Why this matters: Getting verification wrong means losing the Rule 506(c) safe harbor — turning your raise into an unregistered, non-exempt sale of securities, with potential Section 5 liability, investor rescission rights, and disqualification consequences. Verification is not paperwork; it is the exemption.
The Most Common Mistake
Accredited verification is not KYC / AML
Two compliance files sit on every sponsor's desk at every subscription. They sound similar. They are not. Treating one as a substitute for the other is among the costliest mistakes in private capital raising.
| Accredited Verification | KYC / AML / Sanctions | |
|---|---|---|
| The question | May this investor buy this security? | May this money enter the U.S. financial system? |
| Legal source | Securities Act §4(a)(2); Rules 506(c) & 501(a) of Reg D. | Bank Secrecy Act; OFAC sanctions; state financial-crimes law. |
| Who is checked | The purchaser (and, for entities, the equity owners). | The investor plus all 25%+ beneficial owners and a control person. |
| What's checked | Income, net worth, or qualifying license. | Identity, source of funds, sanctions / PEP status, geographic risk. |
| Who examines | The SEC. | FinCEN, OFAC, DOJ, and federal banking regulators. |
| Failure mode | Loss of the 506(c) safe harbor; §5 liability; rescission. | Civil & criminal penalties; OFAC strict liability; lost bank relationships. |
The myth worth dismantling: "Our third-party accredited-investor letter means we're AML-compliant." It does not. That letter speaks only to Rule 501(a) status. It does not verify identity for KYC, screen against the OFAC SDN list, establish beneficial ownership, or prove source of funds. Two different frameworks, two different files.
Where the AML rules stand in 2026
FinCEN IA AML Rule — deferred
The investment-adviser AML rule's effective date was postponed from January 1, 2026 to January 1, 2028. Treat it as a deferral, not a repeal.
Corporate Transparency Act — narrowed
A March 2025 interim rule exempts U.S. domestic companies and U.S. persons; only foreign reporting companies must file beneficial-ownership reports.
OFAC sanctions — always on
OFAC screening is strict liability and never deferred. Every U.S. person must screen each investor and beneficial owner against the SDN list, continuously.
At Subscription
The file that should land at closing
A complete intake file holds up under bank-counterparty diligence, SEC examination, and future FinCEN review. Here is what belongs in it.
Accredited verificationIncome, asset, or third-party letter dated within 90 days of subscription.
Government ID + W-9 / W-8For individuals; certified entity documents for organizational investors.
Beneficial ownership certification25%+ equity owners and one control person; identity for each.
OFAC / SDN / PEP screenRun on the investor and each beneficial owner; result and date in file.
Source-of-funds attestationInvestor representation, plus a bank or counsel letter where indicated.
Bad Actor questionnaireRule 506(d) covered-person screen; refreshed at each offering.
Subscription agreement + side letterCounter-signed, with all accreditation and AML reps in current form.
Wire reference pageWire from a bank account in the investor's name; reconciled to the record.
First-Wave Questions
Frequently asked, briefly answered
Can I post my raise on LinkedIn or my website?
Only if you are using Rule 506(c). Public posting is "general solicitation," which is prohibited under 506(b). Under 506(c) you may advertise — but every investor must then be verified as accredited, and you cannot accept any non-accredited purchasers.
Do investors have to prove they're accredited?
It depends on the exemption. Under 506(b), a written representation (self-certification) is generally enough absent red flags. Under 506(c), the issuer must take reasonable steps to verify — typically income or asset documentation, or a third-party letter from a CPA, attorney, broker-dealer, or registered adviser.
Is there an official accredited-investor certificate or registry?
No. There is no government card or registry. Accreditation is confirmed at the point of each specific investment, based on the Rule 501(a) pathways — income, net worth, license, or entity status.
If I use a third-party verification service, am I AML-compliant too?
No. A verification letter confirms accredited status under securities law only. It does not satisfy KYC identity checks, OFAC sanctions screening, beneficial-ownership diligence, or source-of-funds review. Those are a separate compliance file with separate legal sources.
Do I still have to file a beneficial-ownership report under the CTA?
For most U.S. companies, no — the March 2025 interim rule exempts domestic entities and U.S. persons; only foreign reporting companies registered in the U.S. must file. But prudent fund managers still collect beneficial-ownership information, because bank counterparties continue to require it under separate diligence rules.
Can non-accredited investors ever participate?
Under Rule 506(b), up to 35 sophisticated non-accredited investors may participate (with enhanced disclosure). Under 506(c), no — purchasers must all be verified accredited investors. Other exemptions (such as Reg CF or Reg A+) allow broader participation under different rules.
Ready for the Specifics?
Your raise has facts this page can't cover.
This primer answers the first wave. The next wave — your structure, your investors, your jurisdiction — is where counsel earns its keep. Reach our securities and private-funds team directly.