By Max Riffin and Jay Cho
Raising capital often presents complex challenges for companies. One major decision companies face is whether to conduct a public offering – with the attendant registration and disclosure obligations – or to opt for a private securities offering that can provide advantages in speed and flexibility. A public offering (such as an IPO) gives companies access to a broad investor base, but it typically involves a time-consuming and expensive filing process, detailed disclosures, and ongoing reporting obligations. By contrast, private securities offerings allow issuers to raise funds from select investors without registering the securities with the Securities and Exchange Commission (SEC), so long as specific regulatory requirements are met.
Below, we outline some factors that can guide companies in deciding whether to consider a private securities offering, along with information about the two types of private offerings.
Differences Between Public and Private Offerings
A private placement of securities is, in essence, a private sale of stock, convertible instruments, bonds, or other securities to a limited number of pre-selected and often sophisticated investors rather than to the general public. These transactions for raising capital rely on exemptions from registration under the Securities Act of 1933 (Securities Act), one of which is Regulation D. Issuers of securities may prefer a private placement over a public offering if they want to preserve confidentiality, avoid the costs and expense of an initial public offering, mitigate the burdens of SEC reporting, or secure capital more quickly.
Generally, any private placement of securities must comply with Section 5 of the Securities Act, which requires the issuer to file a registration statement. However, Section 4(a)(2) of the Securities Act exempts from the registration requirement “transactions by an issuer not involving any public offering” (i.e., a private placement of securities). If a company/issuer complies with the requirements of Rule 506 of Regulation D, then its offering will fall within Section 4(a)(2) and will be considered a private placement of securities.
The contrast between private placements and public offerings is notable. In a public offering, a company registers its securities with the SEC, discloses extensive financial and business information, and offers shares on a national securities exchange or similar exchange trading platform. Investors of all types – retail or institutional – can purchase these shares without significant limitations. Private offerings are designed for a narrower pool of investors, typically those meeting the definition of “accredited” or qualified investors under federal securities laws.1 These offerings are not traded on public exchanges, and issuers generally cannot advertise them broadly unless they comply with specific verification measures.2
The private route spares issuers the rigors of the public registration process and the perpetual SEC reporting that follows going public. However, it imposes conditions on the qualifications of potential investor prospects and restricts general solicitation, unless the issuer structures the offering to allow for such broad advertising under Rule 506(c) of Regulation D (as discussed below). This trade-off enables some companies – especially younger businesses or private investment funds with niche objectives – to concentrate on growth or specialized investment goals, rather than devoting resources to comprehensive regulatory compliance.
Key Rules for Private Offerings Under Regulation D
Regulation D was designed to facilitate capital raising while maintaining certain investor protections. It provides for two varieties of private offerings, under Rule 506(b) and Rule 506(c).
Under Rule 506(b), an issuer may privately raise unlimited capital so long as it does not engage in general solicitation or advertising. This approach usually requires the issuer to cultivate a substantive relationship with investors before discussing the securities. It also permits an unlimited number of accredited investors, while allowing up to 35 sophisticated non-accredited investors.3 Issuers generally are allowed to rely on self-certification or “reasonable belief” when confirming an investor’s accredited status.
The Rule 506(c) form of private offering differs in that it explicitly allows general solicitation – meaning public promotion of the offering via channels such as social media or press releases. However, in exchange for this broader marketing, an issuer must verify each investor’s accreditation status with greater rigor. Verification often involves a review of tax returns, financial statements, or professional attestations from attorneys or CPAs. This approach can help a company reach a larger pool of potential investors, but may deter those who prefer not to share personal financial documents.4
Recent SEC Staff guidance has now made Rule 506(c) slightly less onerous. In a March 2025 “No-Action Letter,” the Division of Corporation Finance confirmed that an issuer may treat an investor’s own certification as “reasonable steps” to verify accredited-investor status if the investor commits at least $200,000 (natural persons) or $1 million (entities), represents that the investment is not being financed for this specific purchase, and the issuer has no contrary knowledge. This safe harbor provides comfort to sponsors who already impose large minimum investment thresholds, but it does not ease antifraud standards or pre-empt state, or non-U.S. marketing rules, all of which must still be considered before any public outreach under Rule 506(c).5
Within Regulation D’s framework, most investors must qualify as accredited, meaning that they meet net worth or income thresholds or hold particular professional certifications. Some private funds target (or are required to target) an even more selective category, qualified purchasers, who meet higher asset thresholds.6 The SEC’s rationale is that these investors possess the sophistication and financial resources to evaluate potential risks without the full suite of protections afforded by the public registration process.
Conclusion
Private securities offerings under Regulation D present a relatively streamlined avenue for raising capital compared to a public offering. Companies can move quickly, negotiate individualized deal terms (typically, pursuant to a term sheet), and avoid the costs and disclosures associated with SEC registration. That said, choosing the right Rule 506 exemption – whether 506(b) for its no-solicitation simplicity or 506(c) for the expanded reach of public advertising – remains an essential strategic decision.
Issuers should be mindful that improper solicitation or offering to unqualified investors can lead to significant consequences, including investor recission rights and potential regulatory enforcement. In most cases, it is advisable to consult securities counsel for guidance on structuring the transaction, drafting necessary disclosure documents, and ensuring each step complies with federal and state law.
For further guidance on how to structure and proceed with private securities offerings, please contact Russel Hansen at [email protected], Max Riffin at [email protected] or Jay Cho at [email protected].
[1] See Regulation D, Securities Act of 1933; see also the definitions under SEC Rule 501(a).
[2] SEC Rule 501(a).
[3] SEC Rule 506(b) under Regulation D.
[4] SEC Rule 506(c) under Regulation D.
[5] SEC Div. Corp. Fin., No-Action Letter – Accredited-Investor Verification under Rule 506(c) (March. 2025).
[6] See Section 2(a)(51) of the Investment Company Act.
