The Securities and Exchange Commission (SEC) has proposed new rules that will make it substantially more costly and difficult for startups and early stage companies to raise capital. These rules are designed to ensure that what they have labeled as “bad actors” are not involved in the securities offering business. No, these rules won’t spare you from any bad movies.

Why does this matter to you as the founder of or investor in a startup? Because your startups could be disabled from using Rule 506, the most commonly used securities law exemption by startups, because of these rules.

If you are not aware of Rule 506, it is the most commonly used securities law exemption for private companies raising capital. As stated by the SEC:

Rule 506 is one of three exemptive rules for limited and private offerings under Regulation D. It is by far the most widely used Regulation D exemption, accounting for an estimated 90-95% of all Regulation D offerings and the overwhelming majority of capital raised in transactions under Regulation D.

Rule 506 permits sales of an unlimited dollar amount of securities to be made, without registration, to an unlimited number of accredited investors …, so long as there is no general solicitation, appropriate resale limitations are imposed, any applicable information requirements are satisfied and the other conditions of the rule are met....