Understanding Fundraising Regulations

New VC fund managers do not know that these things they are doing are completely ILLEGAL… ❌ There are very strict rules around fundraising. Yet many new GPs copy what they see others doing — even when it’s illegal. The risk? Trouble today, or 5–10 years down the line when regulators or LPs look closer. Sophisticated LPs know the legal lines — and crossing them exposes both liability and inexperience. Here are the 3 most common fundraising violations (and how to avoid them): 1️⃣ PERFORMANCE-BASED FUNDRAISING COMPENSATION 👩🏾⚖️ Many “Vendors” often say: - “I’ll be a venture partner — give me carry for LPs I bring.” - “We’ll raise for you — just pay a % of capital committed.” 🚫 Illegal without a broker-dealer license ($50K–$150K+ + ongoing compliance). Even employee bonuses tied to fundraising can trigger violations. ✅ Legal way: Pay fixed fees or salaries unrelated to fundraising. Compensate with cash, equity or carry — but not tied to capital raised. 👉 Reality check: As a new manager, it’s extremely unlikely that anyone else can fundraise for you without a track record. You’ll almost always need to do the hard work yourself. 2️⃣ GENERAL SOLICITATION 👨🏻⚖️ New managers assume LPs will roll in if they “go public.” Tactics include: • LinkedIn posts about fundraising • Cold DMs to people • Podcasts/webinars about your fund • “Contact us to invest” buttons on websites 🚫 All illegal — unless you’ve structured under narrow exemptions. Even cold outreach counts as solicitation. ✅ Legal way: You can only pitch people you have pre-existing relationships with who are accredited investors. Network authentically, vuild relationships, then pitch one-on-one. 👉 Reality check: Public fundraising isn’t just illegal — it looks cheap. LPs won’t trust someone blasting cold posts with no track record. VC is trust-based. Public asks scream inexperience. 3️⃣ RAISING FROM EU LPS WITHOUT COMPLIANCE 🧑🏿⚖️ Many assume: • “If a European LP wants in, I can accept the money.” • “Everyone else does it — must be fine.” 🚫 Wrong. The EU regulates under AIFMD (Alternative Investment Fund Managers Directive) and MiFID II (Markets in Financial Instruments Directive). Even one EU LP can trigger filings. Regulators act quickly. ✅ Legal way: Work with EU securities counsel. File required notifications in each jurisdiction before accepting European LPs. 👉 Reality check: European LPs expect compliance. Skip it, and you lose credibility. Worse — a violation can come back years later and jeopardize your fund. Breaking the rules — even by accident — is the fastest way to undermine your credibility. And “everyone else does it” is not a defense. The managers who win are the ones who know the rules, build real relationships, and raise the right way. ⚖️ Know the rules. Follow them. Your fund' future depends on it.

♦️ You should be careful before using the word "fundraising". You really, really should ... My left eye twitches when I see founders actively post on social media talking about fundraising like its a well understood term BUT in the world of law, regulation and regulators, it really can mean different things. If you market your raise aggressively using the word "fundraising" if you describe it as an "appeal" or emphasise mission over returns, you can inadvertently trigger securities law issues or charity regulations. In the UAE, depending on who you approach and how you structure this, you might be making an unregistered public offering or a charity request. Other jurisdictions have equally strict accreditation, solicitation and charity rules. The founders who get the best terms are the ones who speak about capital with absolute clarity. Some good examples I have seen are: - Capital raise - Equity round - Closing a round Definitely do not use the words "I'm fundraising" or "seeking investment". The precision of wording tells the investor you know what you are doing, that they are not donating and that you have done this before.

"I just raised Rs 1 crore for my startup. Can you help me structure it?" I receive this as a corporate lawyer multiple times every week. My first question is always the same. Has the money hit the company's bank account? The answer almost always comes with a smile. Yes. Sometimes they even mention they have spent a portion of it already. That smile fades quickly when I explain what has actually happened. They have not raised funds. They have created a compliance problem. Multiple, in fact. Here is what most founders do not know. Receiving money in your bank account is not the first step in a fundraising transaction under Indian corporate law. It is the second last step. Everything that comes before it: board resolutions, shareholder approvals, offer letters, a separate escrow account for subscription money has to happen first. In a specific sequence. With specific filings. When money arrives before any of that process has been followed, the company has not completed a fundraise. It has received unexplained funds with no legal basis for their existence in the account. The non-compliances are not minor. Under Section 42 of the Companies Act, 2013, a private placement that does not follow the prescribed procedure exposes the company, its promoters, and its directors to a penalty. The money received cannot be legally deployed until allotment is complete and Form PAS-3 is filed with the Registrar of Companies. If allotment does not happen within 60 days of receipt, the entire amount must be refunded with interest at 12% per annum. And if a portion has already been spent? That problem has no clean solution after the fact. This is why a lawyer has to come in before the transaction begins. Not after the money moves. Not to document what already happened. To structure what is about to happen. A lawyer brought in after the money has arrived can help you understand the damage. A lawyer brought in before can make sure there is none. The sequence is not a formality. It is what makes the fundraise legally valid. Engage first. Raise second.

No VC can publicly advertise deals. In most markets, VCs can’t post “We’re raising” updates on LinkedIn. You can’t run Facebook ads for your fund. And founders can’t legally blast pitch decks to the public. Why? Because VC operates under private placement norms. That means all fundraising, whether for your fund or a startup, is meant to stay private. Shared through closed circles. Not mass marketed. In India, the US, and many other markets, this is a legal boundary, not a choice. In the US, most VC funds follow U.S. Securities and Exchange Commission rules (like Rule 506(b)) prohibiting general solicitation, though limited public updates or thought leadership are fine if they don’t pitch investments. India’s Securities and Exchange Board of India (SEBI) and Companies Act enforce similar restrictions, as do regulations globally. So if you're a VC expecting inbound deal flow from posts or public buzz, you're missing how the system works. VC is a network game. Not a billboard game. You don't win by shouting louder. You win by being known in the right rooms. That means: ↳ Building trust with founders before they fundraise ↳ Having a sharp, memorable thesis people remember ↳ Getting into tight founder networks and staying useful there ↳ Earning referrals from other investors, founders or operators ↳ Being present in real conversations, not just public threads It also means founders don’t just find good VCs, they're introduced to them. And the best VCs don’t wait for warm intros. They build their own heat by being visible where it counts. If you're raising a VC fund, this applies to you too. You can’t run ads for LPs. You can't broadly solicit capital. You have to raise quietly based on reputation, clarity and sharp positioning. And that’s why most early VC funds don’t fail because they lack returns. They fail because they never cracked access. No LP access = no fund. No founder access = no deals. So here's the truth most new VCs miss: Being good at investing isn’t enough. You need to be trusted, respected and remembered in circles that aren’t public. VC may be a capital game. But access is still the currency....

🚨 I keep seeing this time and time again on LinkedIn! Founders publicly announcing that they’re “raising £X”, describing the business, setting out growth plans, and then inviting investors to get in touch. All in an open post, visible to anyone. I completely understand why people do it. Fundraising is hard, networks matter, and LinkedIn feels like the obvious place to start conversations. But under UK financial promotion rules, posts like this are often a problem. If you’re: ➡️ stating that you’re raising money, ➡️ describing the opportunity, or ➡️ inviting people to invest or contact you to do so, then you are very likely making a financial promotion. And unless that promotion is properly structured (or limited to the right audience), it risks breaching FSMA s.21. Two points that are commonly misunderstood: “I’m just sharing what we’re doing” – context matters. Once fundraising is mentioned, the line is easily crossed. “It’s only aimed at angels” – LinkedIn is not a restricted channel. Anyone can see it unless you take steps to control the audience. None of this is about being anti-founder or anti-raising. It’s about protecting businesses (and directors personally) from avoidable regulatory risk. There are compliant ways to: build investor conversations, signal that you’re fundraising, and use LinkedIn effectively, but they require a bit more care in wording, sequencing, and who sees what. If you’re fundraising and using social media as part of that process, it’s worth getting this right early rather than trying to fix it later. Happy to discuss best practice with founders who want to raise capital without unnecessary regulatory exposure. — The Cap Lawyer

506(b) vs 506(c): The fundraising rule most first-time syndicators get wrong. One lets you raise from anyone you know. The other lets you advertise to strangers. Choose wrong and you're not losing investors. You're breaking securities law. Here's the simple version: 506(b): • You can raise from unlimited accredited investors plus up to 35 non-accredited. • No general solicitation allowed. • No ads, no LinkedIn posts about your deal, no cold outreach. • Only people you already have a relationship with. 506(c): • Accredited investors only. • You must verify their accreditation. • You can market publicly. • Ads, podcasts, LinkedIn, billboards, cold emails all fair game. Sounds straightforward. But watch how sponsors mess this up: Mistake A: You file 506(b) because you want to include a few non-accredited friends and family. Then you post on LinkedIn: "Excited to announce our new multifamily deal. DM me for details." That's general solicitation. That's a violation. Mistake B: Or you file 506(c) so you can market your deal publicly. Your college roommate wants in. He's not accredited, but he's good for it. You take his money anyway. That's a violation. Both mistakes are common. Both are costly. The SEC doesn't care that you didn't know. Ignorance isn't a defense. Here's how to choose: Choose 506(b) if: • You're raising from your existing network. • You want to include non-accredited investors. • You don't need to advertise publicly. Choose 506(c) if: • You want to build a broader investor base. • You're comfortable with content and public marketing. • All your investors are accredited and you can verify them. The bottom line: This isn't a decision to make on your own. Your securities attorney should be your first call, not your last. The filing costs a few thousand dollars. The violation costs your entire business. Which exemption are you using for your next raise — and why?

The 3 Critical Paths for Capital Raises (...ignore these at your peril) Many syndicators overlook a fundamental legal reality when scaling to larger properties: Once you're #raisingcapital from passive investors where the returns are generated by YOUR efforts, you're in the securities realm. Here's the crucial legal framework that every sophisticated sponsor needs to understand: ⚖️ The Securities Trilemma — When structuring your capital raise, you have exactly three paths: 1. Registration with SEC ✔️ Equivalent to going public ✔️ Cost and time-prohibitive for most sponsors ✔️ Rarely suitable for real estate syndications 2. Registration Exemption (think 506B, 506C, Reg A) ✔️ Primary pathway for most sponsors ✔️ Strategic flexibility within compliance ✔️ Cost-effective regulatory solution 3. Non-Compliance ✔️ Never a viable option ✔️ Significant personal liability ✔️ Potential criminal implications 🔍 Strategic Exemption Analysis: 506(b) Framework: - Allows for some non-accredited investors - Prohibits general solicitation - Generally requires pre-existing, substantive relationships - Enhanced disclosure requirements for non-accredited investors 506(c) Framework: - Accredited investors only - Permits advertising and general solicitation - Third-party verification of investor’s accreditation status required - Broader marketing flexibility Reg A+ Framework: - Allows for both accredited and non-accredited investors - Allows for both accredited and non-accredited investors - Permits general solicitation and advertising  - Must obtain SEC qualification for offering materials before raising - Maximum raise of $75M Here's what successful sponsors understand: Your exemption choice shapes your entire capital-raising strategy. In securities law, there are no shortcuts — only strategic choices within a clear regulatory framework.

AB 488 is reshaping how donation platforms operate in California, and it's especially important that companies are compliant as we head into year-end giving. Our new post breaks down what charitable fundraising platforms must do right now: register with the AG, verify charities are in good standing, get written consent before using a nonprofit’s name, disclose fees and beneficiary details clearly, transfer funds on time, and keep audit-ready records. The stakes are real! Teams that miss these steps risk delisting, fines, and lost donor trust at the busiest time of the year. Quick read for product, legal, and ops leads: https://lnkd.in/g_ft3Y-C

Fund Sponsors, are you thinking about paying someone to raise LP capital for you? Read on. Private Placement Agents generally must be registered broker-dealers under the Securities Exchange Act. If you use one, you need legal counsel. Why is this a big deal? 𝗥𝗲𝘀𝗰𝗶𝘀𝘀𝗶𝗼𝗻 𝗥𝗶𝗴𝗵𝘁𝘀 If you violate this law (by paying a private placement agent that is not registered), your LPs have several legal remedies, including potential rescission rights-- which is the right of an investor to cancel their investment and receive a full refund of their capital contributed in exchange for the securities. Bad news. Don't do this. Hire a competent attorney to guide you through the fundraising process.