Your first raise: Rule 506(b), Form D and the California notice

The Rule 506(b) conditions

Rule 506(b) is a private placement exemption that prohibits general solicitation. An issuer may sell to an unlimited number of accredited investors, and to no more than 35 purchasers who are not accredited in any 90-day period. Each non-accredited purchaser must have enough knowledge and experience in financial and business matters to evaluate the investment, alone or with a purchaser representative, and the company must give them specified disclosure, including financial statements.

Accredited investors include natural persons with a net worth over $1,000,000, alone or with a spouse or spousal equivalent, excluding their primary residence, or with income over $200,000, or $300,000 jointly, in each of the two most recent years and a reasonable expectation of the same this year. Rule 506(c) allows general solicitation, but every purchaser must be accredited and the company must take reasonable steps to verify that status.

Form D within 15 days

An issuer relying on Rule 506 must file a notice on Form D with the SEC no later than 15 calendar days after the first sale of securities in the offering. If the deadline falls on a weekend or holiday, it moves to the next business day. The SEC says Form D is filed online through EDGAR, carries no SEC filing fee, and does not mean the SEC has approved the offering.

Example: A startup raises a SAFE round from eight angel investors, three of whom live in California. The first investor signs and pays on February 3. The Form D is due by February 18. Before then, the company needs EDGAR access codes, which can take time to obtain, so apply for them as soon as the round is likely.

California filings

Securities sold under Rule 506 are treated as covered securities for state purposes, but states may still require a notice. The DFPI says a Rule 506 notice under Corporations Code section 25102.1(d) is due no later than 15 days after the first sale in California, and can be filed through the DFPI's online system or NASAA's electronic filing depository. No notice is needed if no securities are sold in California.

California also has its own limited offering exemption, Corporations Code section 25102(f), with a notice due within 15 calendar days after the first sale in California. It is a different route from Rule 506 with its own conditions. Decide which exemption you rely on before you start talking to investors, and keep records of who was approached and how.

Your next steps

1. Confirm which exemption you rely on and avoid general solicitation under Rule 506(b).
2. Collect accredited investor representations and diary the Form D deadline.
3. Make the California notice filing within 15 days of the first California sale.