Any time a company sells stock or other securities, it must comply with applicable securities laws.  Federal law requires that all securities transactions be registered with the SEC, unless an exemption from registration applies.  For startup companies, the most widely used exemption is Rule 506 of Regulation D.  That rule allows a company to raise an unlimited amount of money, subject to the following conditions: (1) the company cannot use general solicitation (the JOBS Act will end this prohibition), (2) the company may sell its securities to an unlimited number of “accredited investors” and up to 35 other investors, (3) all non-accredited investors must be “sophisticated,” (4) the company must provide certain information to non-accredited investors, and (5) the securities sold by the company are subject to resale limitations.  In addition to complying with federal securities laws, companies raising funds must also comply with state “blue sky” laws, which vary from state to state.

I am a lawyer and an entrepreneur in Denver.  This is the sixth in a series of posts about legal issues affecting startups.