US federal securities law for US investment into a European company

The offer is where US law attaches

An offer or sale of securities to a person in the United States engages the registration requirement of the Securities Act of 1933 unless an exemption applies, and the issuer is the party that needs the exemption, whatever its place of incorporation. In practice almost every venture round involving US purchasers is structured to fit the private placement safe harbour in Rule 506 of Regulation D, under which offers and sales meeting the stated conditions are deemed not to involve any public offering within the meaning of section 4(a)(2) of the Act.

A failed exemption can give purchasers a rescission right, which in a venture context means investors holding a put option over their investment at the worst possible moment. The compliance work is modest if it is done at the time and awkward to reconstruct two rounds later, when a US acquirer's counsel asks to see the file.

Two routes, and the trade-off between them

Rule 506 offers a choice, and the choice is between marketing freedom and diligence burden.

Under Rule 506(b) there is no general solicitation or advertising, and the offering must satisfy the general conditions of Rules 501 and 502. There may be no more than 35 purchasers, or the issuer must reasonably believe there are no more than 35, in offerings under the rule in any 90 calendar day period, with the count made in accordance with Rule 501(e), which excludes accredited investors, so the cap bites only on non-accredited purchasers and the number of accredited investors is unlimited. Each purchaser who is not an accredited investor, alone or with a purchaser representative, must have such knowledge and experience in financial and business matters that they are capable of evaluating the merits and risks of the investment, or the issuer must reasonably believe that before any sale; and each non-accredited purchaser must receive, a reasonable time before the sale, the information prescribed by Rule 502(b), including financial statements prepared under US GAAP or IFRS as issued by the IASB, which is why many issuers keep a 506(b) round to accredited investors.

The price of this route is discretion: the issuer may approach investors with whom it, or its broker-dealer or adviser, has a pre-existing, substantive relationship, and may pitch at a demo day that meets the conditions of Rule 148, and the SEC staff treat the pre-existing substantive relationship as one way among others of showing that there was no general solicitation, accepting introductions through networks of experienced investors on a fact-specific basis (Compliance and Disclosure Interpretations 256.26 and 256.27); a relationship is substantive only where the issuer has in fact evaluated the investor's sophistication and financial circumstances, so knowing a name is not enough. A founder who has been talking publicly about raising, posting on social media about the round or presenting at an event whose attendees were invited by general advertising may have engaged in general solicitation and lost the ability to rely on it.

Under Rule 506(c) general solicitation is permitted, and two things change in exchange. Every purchaser must be an accredited investor, without the tolerance for a small number of sophisticated non-accredited purchasers. And the issuer must take reasonable steps to verify that purchasers are accredited investors, which is an affirmative obligation, beyond a representation to be collected.

The rule sets out non-exclusive, non-mandatory methods that are deemed to satisfy it for natural persons: reviewing Internal Revenue Service forms reporting income for the two most recent years together with a written representation about the current year; reviewing asset documentation dated within the prior three months plus a consumer report as to liabilities, with a written representation that all relevant liabilities have been disclosed; or obtaining written confirmation from a registered broker-dealer, an investment adviser registered with the Commission, a licensed attorney in good standing under the laws of the jurisdictions in which they are admitted, or a certified public accountant duly registered and in good standing under the laws of their place of residence or principal office, that the confirming person has taken reasonable steps to verify the purchaser's status within the prior three months and has determined that the purchaser is an accredited investor. Where the issuer itself previously took reasonable steps to verify a person, it may rely on a written representation from that person at the time of sale that they still qualify, for five years from the earlier verification, provided it is not aware of information to the contrary.

For a European company the practical consequence is a decision to take early and hold to. If the round will be promoted beyond investors the company already knows, including in ways founders do not think of as promotion, the offering should be structured as 506(c) from the outset, with a verification workflow, and the professional confirmation route is usually the least intrusive way to run it. If discretion is realistic and the purchasers are accredited, 506(b) is lighter, but it requires discipline about public statements.

The bad actor screen, and why it reaches your cap table

The bad actor disqualification in Rule 506(d) needs particular attention. The Rule 506 exemption is unavailable, subject to the exceptions in the rule, where a specified person has suffered one of a list of disqualifying events, and the list of covered persons is wide: the issuer, its predecessors and affiliated issuers; directors, executive officers and other officers participating in the offering; general partners and managing members; promoters connected with the issuer in any capacity; investment managers of pooled investment funds and their principals; anyone paid, directly or indirectly, for soliciting purchasers; and, critically for a European cap table, any beneficial owner of 20 per cent or more of the issuer's outstanding voting equity securities, calculated on the basis of voting power.

The disqualifying events include criminal convictions connected with the purchase or sale of securities or the making of false filings, injunctions and court orders in securities matters, certain final orders of state securities, banking and insurance regulators, specified Commission orders, suspension or expulsion from a securities exchange or association, and United States Postal Service false representation orders, each with its own look-back period. The events are United States proceedings and orders: the Commission's staff has stated that foreign convictions, foreign court orders and orders of foreign regulators do not themselves trigger the disqualification (Securities Act Rules C&DI 260.20), although a non-US founder or shareholder is a covered person like any other and must be screened for US events.

Two features make this a live workstream. First, the 20 per cent voting threshold means a founder or an early investor with a large stake is a covered person, and the screen has to reach them personally. Second, there is a reasonable care defence where the issuer establishes that it did not know and could not have known of a disqualification, but the instruction to the rule states that an issuer will not be able to establish reasonable care unless it has made factual inquiry into whether any disqualifications exist, with the nature and scope of the inquiry varying with the circumstances. The defence therefore requires evidence of having looked. Questionnaires to covered persons, retained and dated, are the standard starting point; the rule prescribes no format, answers that raise doubt call for further inquiry, and a continuing offering calls for a refresh. They are much easier to obtain before a round than during a later acquisition's diligence.

Where the documents collide

The second friction is that US venture documents are written for a Delaware corporation and assume its flexibility. Several features do not transplant cleanly into European company law, and the right response is to rebuild the economics from local law, since translating the clauses does not carry them across.

The most common collision concerns what has to be public. In many continental European jurisdictions, provisions that bind third parties, share classes and their preferential rights, transfer restrictions and certain governance mechanics, must sit in the articles of association, which are filed with a commercial register and publicly accessible. US investors are accustomed to a split of their own: the preferred stock's economic terms, its liquidation preference, dividend, conversion and anti-dilution rights, sit in the Delaware certificate of incorporation or a certificate of designation, filed with the Secretary of State and public (General Corporation Law §151), while investor rights, voting arrangements, drag-along and transfer mechanics sit in private agreements. The friction is that a European register may require some of that second group in the articles for third-party effect, and may require the articles to say more than a Delaware charter would. The workable structure separates what must be in the articles for validity from what can go in a private shareholders' agreement, and accepts that the split is dictated by the jurisdiction.

Preferred stock is the next. A US term sheet assumes a class of convertible preferred with a liquidation preference, anti-dilution protection and a conversion mechanism. European jurisdictions offer preference shares and, in some cases, other instruments, but the mechanics differ and the outcome usually has to be assembled from share class rights plus a contractual waterfall, with the tax treatment confirmed separately. Option pools are similar: the expectation of a large pool with a low strike price meets local rules on the creation of authorised or conditional capital, on the valuation of shares and on employee taxation, and those rules can make the US-standard package expensive for the employees it is meant to reward.

Then there are the governance items. Drag-along and tag-along provisions need to be enforceable against a dissenting minority under the relevant law, beyond being well drafted. Protective provisions and investor consent rights have to be reconciled with the board's own duties, which as we have noted in the context of subsidiary directorships are owed to the company itself, whoever nominated the director. And where the company is or will be regulated, an investor taking 10 per cent or more, or acquiring meaningful influence through consent rights, may trigger a change of control approval before the round can close, which is a timetable item and occasionally a deal breaker.

What else arrives with the money

Beyond documents, US institutional money brings operational expectations that European companies should price into the decision. Information rights and reporting cadence are usually heavier than a European seed investor's, and often assume US accounting conventions, so a company may find itself maintaining two reporting views. Side letters are normal, and a most favoured nation clause in one of them can propagate the best terms across the register, so the letters need to be read together. Some funds have constraints from their own fund documents or from investor regulation that require particular structures, board seats or rights, which are not negotiable positions but constitutional ones for that investor.

The last item is the flip. Many US funds prefer, and some effectively require, a Delaware holding company above the European operating entity. Whether that is necessary depends on the particular fund, since the market as a whole does not require it, and it is worth testing before conceding, because a flip is a transaction in its own right: it has tax consequences for the company and for founders and employees holding options, it may be a regulatory event where any group entity is licensed, and the questions we set out on where a holding company sits apply in reverse. The flip should be decided before the term sheet, when it can be planned as a structuring exercise, before deal pressure decides it.

What this means for you

• Pick your Regulation D route before you talk to anyone. 506(b) is lighter for an all-accredited round but allows no general solicitation: approaches are confined to investors the company or its intermediaries already know, plus qualifying demo days. If the round will be promoted more widely, structure it as 506(c) from the start and build the verification workflow.
• Verification is a process. Under 506(c) the issuer must take reasonable steps to verify accredited status. Written confirmation from a registered broker-dealer, an SEC-registered investment adviser, a licensed attorney in good standing or a registered CPA in good standing, that they have taken reasonable steps within three months and determined that the purchaser is accredited, is a deemed-compliant method.
• Screen every 20 per cent voting holder, and keep the paper. The bad actor rule reaches beneficial owners of 20 per cent or more of voting equity, and the reasonable care defence requires factual inquiry proportionate to the circumstances; dated questionnaires are the usual evidence, followed up where an answer raises doubt.
• Rebuild the economics in local law. Liquidation preferences, option pools, drag-along rights and consent provisions have to be assembled from local share class rights and contract, with attention to what the articles must disclose publicly.
• Read the side letters together. A most favoured nation clause in one letter can propagate the best terms across the register, and constraints that come from a fund's own documents are fixed for that investor and should be identified early.
• Decide the flip question early. A Delaware topco is a transaction with tax consequences and, where any entity is licensed, possible regulatory consequences. Test whether the fund requires it before conceding it under deal pressure.

Isak Legal advises European companies, founders and investors on cross-border financings, including United States private placement structuring, investment documentation and the corporate steps that sit behind a round. Michael Isak is admitted in New York. See our Corporate page, or get in touch.

This client update is provided for general information only, reflects the position as at 27 September 2026 and does not constitute legal advice or create a lawyer-client relationship. The United States position is taken from 17 CFR 230.506 in the current eCFR text and should be read with Rules 501 to 503, which contain definitions and conditions not set out here, including the accredited investor definition (Rule 501), the general conditions (Rule 502) and the Form D notice filing requirement (Rule 503), and the integration rules in Rule 152, under which offers and sales made in compliance with Regulation S or Rule 701 are not integrated with other offerings, and offerings separated by more than 30 calendar days are within a safe harbour, subject to the reasonable-belief test where a no-solicitation offering follows one that permitted general solicitation. State securities laws may also apply. This note does not address tax in any jurisdiction, and the tax consequences of share classes, option arrangements and any restructuring require advice from qualified tax advisers. Company law points concerning Swiss, Irish or other European entities require local counsel. For advice on a specific matter, please contact us.