What is a private placement?
Takeaway: A private placement is the primary legal pathway for startups to raise capital by selling securities directly to a limited number of sophisticated investors without having to go through the complex and expensive process of a public offering.
The Securities Act of 1933 creates a fundamental rule: any offer or sale of a security must be registered with the U.S. Securities and Exchange Commission (SEC) unless a specific exemption is available. A full registration is the process that companies go through for an Initial Public Offering (IPO), and it is far too costly and burdensome for an early-stage startup. Therefore, the entire venture capital fundraising model is built upon a key set of exemptions that allow for a private placement.
A private placement is a direct sale of a company's securities (such as stock, SAFEs, or convertible notes) to a select group of investors. It is "private" because it is not offered to the general public. It is the primary legal mechanism that allows your startup to raise capital from angel investors and venture capital funds in a compliant manner.
Regulation D: The Safe Harbor for Private Placements
The most important exemption for startups is Regulation D of the Securities Act. Regulation D provides several "safe harbors," and the one almost universally relied upon by venture-backed companies is Rule 506. Rule 506 itself comes in two flavors:
Rule 506(b): This is the traditional private placement rule. Under 506(b):
You can sell securities to an unlimited number of accredited investors.
You can also sell to a limited number (up to 35) of non-accredited investors, but if you do, you must provide them with a detailed set of disclosures similar to what would be in a public offering prospectus. This is a significant burden.
You are prohibited from using any form of general solicitation or advertising to market your offering. You can only raise capital from investors with whom you have a pre-existing substantive relationship.
Rule 506(c): This rule was created by the JOBS Act and allows for a more modern approach. Under 506(c):
You are permitted to use general solicitation and advertising. This means you can publicly announce that you are fundraising on your website, on social media, or at a demo day.
However, you can only sell your securities to accredited investors. You are barred from accepting any investment from non-accredited investors, and you must take "reasonable steps" to verify each investor's accredited status.
For most startups raising capital from VCs and other sophisticated investors, both of whom are accredited, the Rule 506 framework provides a clear and compliant path. After the sale, the company is required to file a simple notice with the SEC called a Form D. This form provides basic information about the offering but does not require detailed financial disclosures.
Understanding the private placement rules is essential for any founder. It is the legal architecture that enables you to fund your vision while staying safely within the bounds of U.S. securities law.
Disclaimer: This post is for general informational purposes only and does not constitute legal, tax, or financial advice. Reading or relying on this content does not create an attorney–client relationship. Every startup’s situation is unique, and you should consult qualified legal or tax professionals before making decisions that may affect your business.