This article was originally published by Funder in February 2026.
Beyond the Stock Exchange: Why securities laws apply from the very first dollar and how to avoid personal liability for founders.
Many Israeli entrepreneurs believe that U.S. securities laws apply only to public companies. This is a common and dangerous misconception that creates severe legal exposure for foreign startups.
In the United States, private capital raising is heavily regulated. Violations can trigger Rescission Rights, giving investors the right to get their money back, regulatory enforcement, and in some cases, personal liability for founders and directors. These risks exist even when there is no intent to break the law.
U.S. securities law can apply if capital is raised from U.S. investors, if the solicitation occurs while founders are physically in the U.S., or if U.S.-based platforms are used. Jurisdiction follows the conduct, not just the place of incorporation.
The default rule under U.S. law requires the registration of securities offerings unless a specific exemption applies. Registration is expensive and slow, so most startups rely on exemptions, most commonly Regulation D. However, exemptions are conditional, technical, and unforgiving. If the exemption fails, the offering is considered void.
Offerings under Regulation D generally restrict sales to Accredited Investors, a term with a precise legal definition based on income, net worth, or institutional status. Guesswork is insufficient. Companies must have a reasonable basis to believe every investor meets the criteria.
Israeli entrepreneurs face additional complexities such as immigration status, Anti-Money Laundering (AML) duties, and Know Your Customer (KYC) requirements. Questions regarding the source of funds arise quickly. Disclosure expectations around foreign operations or military-related technology are higher than expected. Informality invites scrutiny.
The most dangerous aspect of securities violations is that they often surface only after the investment is made. Investors may be happy while the company grows, but problems start when performance dips or a later funding round collapses. At that point, technical violations become leverage.
Before taking a single U.S. dollar, the offer must be structured correctly, investors must be vetted, and disclosures must be accurate and complete. U.S. securities law is rigid, but it is predictable if addressed early.
Michael Ehrenstein, Esq., is a founding partner at the U.S. law firm Ehrenstein|Sager, specializing in commercial law, complex litigation, and high-stakes international arbitration.
Legal Disclaimer: This article does not constitute legal or tax advice. Its purpose is to raise awareness of U.S. compliance issues. Israeli businesses should consult qualified U.S. legal and tax professionals for advice tailored to their specific operations.