The Securities Act of 1933 was enacted to ensure that investors receive significant information regarding securities being offered for public sale, and to prevent deceit, misrepresentations, and other fraud in the sale of securities. A SAFE, as a security, must be either registered with the SEC or qualify for an exemption from registration requirements. The act requires disclosure of financial and other information to the potential investors; this process is known as registration. Exemptions from registration include private placements, small offerings, and transactions by an issuer not involving any public offering.
The Securities Exchange Act of 1934 created the Securities and Exchange Commission (SEC) to regulate the secondary securities market and ensure greater financial transparency and accuracy, prevent fraud, and to regulate the activities of brokerage firms, transfer agents, and clearing agencies. It also governs the disclosure of information by publicly traded companies. Companies with SAFEs that convert into equity may become subject to the reporting requirements under this act if they meet certain thresholds, such as having a certain number of shareholders and assets.
The JOBS Act, enacted in 2012, is designed to encourage funding of small businesses by easing various securities regulations. It includes provisions such as Title III, which allows for a broader range of investors to participate in crowdfunding, and Title II, which lifted the ban on general solicitation for certain private placements. Startups using SAFEs may fall under these provisions when raising capital, allowing them to raise funds from a larger pool of investors without having to register the securities with the SEC.
Regulation D consists of Rules 504, 505, and 506, which provide exemptions from the registration requirements, allowing companies to raise capital through the sale of securities without the need to register with the SEC. Rule 506(b) and 506(c), for instance, are commonly used exemptions for startups raising capital through instruments like SAFEs. These rules have specific requirements regarding the types of investors that can participate, the amount of money that can be raised, and the disclosure of information to investors.