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A company can raise money without selling bonds in a public offering by borrowing from one or more private investors and issuing promissory notes. Investors provide capital; the company promises to repay principal, usually with interest, under the note’s terms. The company still must comply with securities laws: calling a note “private” does not by itself exempt its offer or sale from registration.
What a private note does
A promissory note is debt—similar to a loan or an IOU—that a company may issue to raise money, as the U.S. Securities and Exchange Commission (SEC) explains in its investor guidance. In a private-note financing, the issuer borrows from selected investors rather than selling bonds through a public registered offering. The company receives funds and takes on a repayment obligation.
The note’s actual agreement, not the label “private note,” determines the parties’ contractual rights. Read it for the principal amount, interest rate, maturity date, payment schedule, collateral or security, default consequences, prepayment rights, and transfer restrictions. These terms are deal-specific; there is no single standard rate, maturity, or collateral arrangement established for private notes.
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- Set the borrowing terms. The issuer determines how much it seeks, what it will use the proceeds for, and the proposed repayment terms. Investors should assess whether the company’s plan and likely cash flow can support repayment.
- Identify the securities-law route. The company determines whether the note is a security and, if it is, whether the offer and sale will be registered or rely on an available exemption. The SEC says federal securities law applies to every offer and sale of securities, even one made to a single person. A promissory note is not automatically exempt merely because it is privately negotiated.
- Approach eligible investors under the chosen exemption. The exemption can affect whether the issuer may advertise broadly, who may invest, and what verification or disclosures are required. Regulation D Rules 506(b) and 506(c) are common pathways, but not every private note offering uses Regulation D.
- Document and close the sale. The issuer and investors execute the note and related offering documents. The documents should make the payment obligation and material risks clear; investors should not rely on verbal assurances that differ from the written terms.
- Complete required filings and observe state requirements. For Regulation D offerings, issuers generally file Form D with the SEC within 15 calendar days after the first sale. The SEC staff describes the first sale as the date the first investor is irrevocably contractually committed. State rules can also require notice filings, fees, or consent to service of process.
How Rules 506(b) and 506(c) differ
| Offering route | Solicitation and purchasers | Key requirements described by the SEC |
|---|---|---|
| Rule 506(b) | No general solicitation. The issuer may sell to accredited investors and to no more than 35 non-accredited investors in any 90-calendar-day period. | Any participating non-accredited purchasers must meet a sophistication standard, and the issuer must provide them specified information. Other Regulation D conditions apply. The 35-person limit and 90-day period are regulatory conditions in SEC guidance, not market statistics. |
| Rule 506(c) | General solicitation is permitted, but every purchaser must be an accredited investor. | The issuer must take reasonable steps to verify each purchaser’s accredited-investor status. Other Regulation D conditions apply; the securities are restricted, and state notice filings and fees may still apply. |
These routes are not interchangeable shortcuts. The issuer’s choice changes how it may find investors and what it must establish about them. Regulation D issuers generally have the Form D deadline described above, while state securities requirements remain relevant. Rule 506 offerings are preempted from state registration and review, but states retain anti-fraud authority and may require notice filings, consent to service of process, and fees.
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Other exempt fundraising routes
Regulation D is not the only possible route for raising capital without a public registered bond sale. The SEC also identifies Rule 504, Regulation Crowdfunding, and Regulation A as exempt-offering pathways. They differ in eligibility, amount limits, solicitation rules, purchaser eligibility, disclosure and filing duties, use of an intermediary or platform, and potential investor liquidity.
For example, the SEC’s exempt-offerings overview states that Rule 504 permits up to $10 million in a 12-month period, subject to conditions. That is a regulatory cap in the SEC overview last updated January 26, 2026—not a measure of typical private-note financing. The available information does not establish which exemption fits any particular issuer or note; that depends on the offering and applicable requirements.
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What investors should verify before buying
A note is a promise to pay, not proof that the issuer will have the funds to do so. The SEC advises investors to investigate an issuer’s ability to pay, particularly when a note is not registered. Before investing, work through the following checks:
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- Issuer and proceeds: Who is legally borrowing, what will the company do with the money, and what evidence supports its business and repayment plan?
- Repayment terms: What are the principal, interest, maturity, payment dates, default provisions, collateral, and prepayment rights? Are any guarantees actually documented, and who stands behind them?
- Legal route and disclosures: What registration exemption does the issuer claim? Who is eligible to buy under it, and what offering documents explain the terms, risks, and issuer’s financial condition?
- Ability to repay: Could the company meet its obligations under a downside case, not just its optimistic projections? A stated interest rate does not establish that the issuer can pay.
- Exit and transfer: Can the note be transferred, and what real market or other exit is available? Do not assume you can sell before maturity.
Warning signs and liquidity limits
The SEC flags high fixed returns, assurances that an investment is “guaranteed” or insured, and broad sales approaches as potential warning signs in promissory-note fraud. Those features do not prove that an offering is fraudulent, but they warrant independent verification. Check whether the offer is registered or claims an exemption, scrutinize the documents, and ask difficult questions rather than relying on a salesperson’s assurances.
Private securities are often illiquid and not freely tradeable. Securities rules and the note contract may restrict resale, so an investor may have to hold the note until maturity—or longer if the issuer cannot pay on time. Liquidity and repayment prospects depend on the specific offering and issuer, not on the word “private.”
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- Corporate Finance 13th Edition by Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor (Author), Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin. (Author), Jeffrey Jaffe , Bradford D Jordan Professor
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