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Companies can raise money without selling publicly registered bonds by borrowing from private investors through promissory notes, provided the offer and sale comply with an available securities-law exemption or are registered. The note is the debt agreement; its “private” label does not itself create an exemption. In the U.S., the legal route determines who may be solicited and who may invest, while the note sets the issuer’s repayment obligations.
What a private note does
A company issuing a promissory note borrows from one or more investors. Investors provide capital, and the company promises to repay under the note’s terms, typically with interest. The SEC describes a promissory note as debt similar to a loan or IOU (SEC investor guidance on promissory notes).
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The note is not a standardized product. Read the actual agreement for principal, interest, maturity, payment schedule, collateral or security, default provisions, prepayment rights, and transfer restrictions. Those terms depend on the particular offering; there is no single rate, maturity, or collateral arrangement that applies to private notes generally.
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One free scan finds every outdated or missing driver and matches the right update for your exact hardware.Free scan · exact hardware matchWhy a private note still needs a securities-law route
In the U.S., the word “private” does not by itself exempt a sale from registration. The SEC says every offer and sale of securities must either be registered or rely on an exemption, including offers by private companies and sales to a single person (SEC: Private Companies and the SEC). Whether a particular promissory note is a security depends on the facts; companies should not assume that every note is, or is not, one.
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For exempt offerings, Regulation D is one familiar route, but it is not the only one. Rules 506(b) and 506(c) differ notably in solicitation and purchaser eligibility:
| Route | Solicitation and purchasers | Key conditions described by the SEC |
|---|---|---|
| Rule 506(b) | General solicitation is prohibited. Sales may include no more than 35 non-accredited investors in any 90-calendar-day period. | Each participating non-accredited purchaser must meet a sophistication standard, and the issuer must provide specified information. Other Regulation D conditions apply. SEC Rule 506(b) guidance |
| 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 status. The securities are restricted; state notice filings and fees may still apply. Other Regulation D conditions apply. SEC Rule 506(c) guidance |
The 35-person limit is a regulatory rule, not a measure of how many investors private-note offerings typically have. Rule 506(b) and Rule 506(c) also differ in how an issuer can find investors, so a company’s intended outreach matters when choosing a route.
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Filings and state requirements still matter
Issuers relying on Regulation D generally must file Form D with the SEC within 15 calendar days after the first sale. SEC staff explains that the first sale is when the first investor becomes irrevocably contractually committed (SEC Division of Corporation Finance: Form D FAQ). This deadline concerns filing; it does not mean SEC approval of the offering.
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What investors should verify before buying
A repayment promise is only as dependable as the issuer’s ability to pay. The SEC advises investors to investigate an issuer’s ability to repay when a note is not registered. Review the offering documents and seek qualified legal or financial advice when the terms or exemption are unclear.
- Issuer and use of funds: Identify the company borrowing the money and what it plans to do with the proceeds.
- Repayment terms: Confirm principal, interest, payment dates, maturity, default consequences, collateral, and any right to repay early.
- Legal route and eligibility: Ask which exemption the issuer claims, who may invest, and what documents explain the offering.
- Ability to repay: Consider whether the company could make payments under a downside scenario, not only if its plans succeed.
- Exit and transfer: Check whether the note can be transferred and what realistic exit is available before maturity.
The SEC flags unusually high fixed returns, claims that an investment is “guaranteed” or insured, and broad sales approaches as potential promissory-note fraud warning signs. These are reasons to verify claims, not proof that every privately offered note is fraudulent (SEC investor tips on promissory-note fraud).
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Liquidity and the possibility of being unable to sell
Private securities are often illiquid and not freely tradeable. Resale may be restricted by securities rules as well as by the note contract, so investors should not assume they can sell their position before the note matures. The SEC’s overview of private secondary markets explains why a resale market should not be taken for granted.
Other ways companies may raise exempt capital
Private notes are one possible financing structure, not the only way to raise money without a public bond sale. The SEC also identifies Rule 504, Regulation Crowdfunding, and Regulation A as exempt fundraising routes. Their eligibility rules, offering limits, solicitation rules, purchaser requirements, disclosures, filings, use of intermediaries, and investor liquidity differ; a company must assess the requirements of the route it uses rather than treating them as interchangeable (SEC overview of exempt offerings).
For example, the SEC’s exempt-offerings overview describes Rule 504 as permitting up to $10 million in a 12-month period, subject to conditions. That is a regulatory limit, not an estimate of typical fundraising or an assurance that a particular issuer qualifies.
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