In the current economic environment, cash and the availability of liquidity have become king. These economic circumstances are causing many businesses to reevaluate their capital structure, even those with strong balance sheets. Private businesses exploring capital raising options have two primary decisions to make: (1) which type of security to offer, and (2) which method to use in order to comply with securities laws.

1.       Capital Structure Options: Which Security to Offer

Rising interest rates are making raising equity capital or more equity-like alternatives more attractive to founders and business owners seeking to finance growth. The chart below illustrates capital structure options from senior debt (much like a typical collateralized bank loan) to common equity. 



Senior Debt

  • Revolving loans and Term Loans
  • Fully collateralized by tangible assets
  • Short term in nature with strict amortization
  • Restrictive covenants
  • Requires personal guarantees by founders

Mezzanine Debt

  • Generally 2nd Lien Term Loans
  • Requires positive cash flows
  • Long term capital with limited or no amortization
  • Flexible and customized covenants
  • Generally includes warrants, but is less dilutive than equity

Hybrid Financing (e.g., Convertible Debt, Convertible Equity)

  • Conversion date to preferred equity
  • Interest rate that can be repaid upon conversion
  • Investors convert to common equity once company goes public
  • Valuation Cap

Simple Agreement for Future Equity (SAFE Note)

  • Considered more founder-friendly than Convertible Debt and closer to equity than convertible debt
  • Outstanding indefinitely until Next Equity Financing ("NEF")
  • No maturity date/conversion date
  • Investors receive only right to convert equity for lower price than NEF

Preferred Stock

  • Typically includes provisions related to liquidation, conversion, callability, and voting
  • Generally carries a dividend, but no amortization
  • Long term capital
  • Highly dilutive

Common Equity

  • Highly dilutive issuance generally affects control
  • Board seats
  • Long term capital
  • No amortization

Methods to Raise Private Capital

After deciding upon the security to be offered, issuers typically evaluate four primary factors in determining the type of securities offering to pursue: (1) dollar size of the offering, (2) whether the offering will require general solicitation to be successful, (3) whether the funds can solely be raised from Accredited Investors—either through the issuer's friends and family or through contacts of a broker-dealer or crowdfunding platform, and (4) what type of SEC filing is required. 

After changes made by the JOBS Act and the adoption of Regulation CF, the key difference among exempt offering methods is whether the offering allows for general solicitation. This is also the most influential factor as to the risk the offering poses to the issuer. General solicitation offerings require additional compliance efforts. Below is a summary of the offering exemptions based upon the aforementioned factors. While there are other things to consider, like whether the securities will be restricted following the offering, or what requirements apply (e.g., "Bad Actor" disqualifications apply or audited financial statements must be provided), the crux of the evaluation of which offering is appropriate often boils down to these factors for middle-market and small businesses. 

Capital Raising Methods and Exemptions Available


Nature of Exemption


Offering $ Limit within 12-month Period

Prohibits General Solicitation

Allows General Solicitation

Accredited Investors Only

SEC Filing Required


Reg. D Rule 506(b)


Unlimited accredited investors, limited to 35 sophisticated investors in 90 day period

Yes. Form D


§4(a)(2)  Transactions must not involve any public offering. Typically involve institutional buyers conducting due diligence that don't need protection of the 1933 Act. SEC v. Ralston Purina Co.



No, but state registration requirements are not preempted by federal law.



Reg D, Rule 506(c)

Only accredited investors and reasonable due diligence steps required

Yes. Form D

$5 million


Regulation CF

Non-accredited investors subject to investment limits based on income and net worth.

Requires use of regulated crowdfunding platform, like Dealmaker,

Yes. Form C (including 2 years financial statements, certified, reviewed or audited, as required)

Individual state limits generally $1 to $5 million


Intrastate rules: §3(a)(11), Rule 147, Rule 147A

In-state requirements for issuer and investor

No SEC filings, but states vary as to notice/registration filing requirements

$10 million


Rule 504

In-state requirements for issuer and investors


$20 million


Reg A, Tier 1



$75 million


Reg A, Tier 2

Non-accredited investors subject to investment limits, unless issuer listed


Securities Filings Required: State or Federal

The vast majority of exemptions require the filing of a securities filing with state and/or federal regulators, (e.g., Form D, Form C, Form 1-A, or state filings) and preparation of subscription agreements and disclosure documents. Many offerings also require audited financial statements and the providing of an offering circular to each investor. These documents should be prepared by a sophisticated securities attorney.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.