Public or Private: What Changes Is Who You Owe Disclosure To

Two Ways to Raise Money

Selling securities in the United States generally requires registration with the SEC, or an exemption from it. Public companies register. Private companies use exemptions, most commonly under Regulation D.

Under Rule 506(b), a company may raise an unlimited amount of money. That surprises people who assume private means small. There is no cap on the sum; the restrictions fall on who may buy and how they may be approached.

Who is allowed to participate

A Rule 506(b) offering may be sold to an unlimited number of accredited investors, plus no more than 35 non-accredited ones. Those non-accredited participants must have enough knowledge and experience in financial and business matters to be sophisticated investors, or be able to bear the economic risk of the investment.

Accredited status is defined by thresholds. An individual qualifies with net worth over $1 million excluding their primary residence, or annual income of $200,000 — $300,000 with a spouse or partner — in each of the two prior years, with a reasonable expectation of the same in the current year.

That is the substantive difference in access. A private offering is closed to most people not because of secrecy but because federal rules restrict who may be sold to.

The Advertising Prohibition

Rule 506(b) permits no general solicitation or advertising to market the securities. A company raising this way cannot promote the offering publicly; it must rely on existing relationships.

This is why private rounds are announced after they close rather than advertised while open, and why access depends heavily on networks. The rule creates the exclusivity that private markets are often assumed to cultivate deliberately.

What Each Side Must Disclose

The asymmetry here is larger than most people expect.

No disclosure is mandated to accredited investors at all. If a company chooses to provide information, it must share the same information with any non-accredited participants, but the baseline obligation is nothing.

Non-accredited investors trigger real requirements: documentation containing information similar to a Regulation A offering, specified financial statement information, and availability to answer questions from prospective purchasers. That burden is a substantial part of why many offerings simply exclude non-accredited investors rather than accommodate them.

Two Routes, Two Sets of Constraints

The two exemptions trade advertising against buyer restrictions. A company wanting to promote an offering publicly may do so under 506(c), but forfeits the ability to include any non-accredited investors and takes on a heavier obligation to verify that every buyer qualifies.

Why the verification standard matters

Under 506(b) the company needs a reasonable belief that an investor is accredited, which in practice often means a questionnaire the investor completes. Under 506(c) that is insufficient; the issuer must take steps to confirm the status rather than accept an assertion.

An investor being asked for tax returns or a letter from an accountant is usually looking at a 506(c) offering. One asked merely to tick a box is usually looking at 506(b), and should note that the absence of scrutiny is a feature of the exemption rather than evidence the offering is straightforward.

Restricted Securities and the Exit Problem

Buyers in a private placement receive restricted securities, meaning they cannot freely resell or distribute them to the public.

This is the structural difference that matters most to an investor. A listed share can be sold in seconds at a quoted price. A private holding cannot be sold at all without satisfying resale conditions or finding a permitted buyer, and there is no continuous price to sell at.

Companies must also file a Form D notice within 15 days of the first sale. It is a notice filing rather than a disclosure document, and it tells the public that an offering occurred, not what the company is worth or how it is performing.

What Going Public Actually Costs

Registration brings obligations that continue indefinitely, and they are concrete rather than abstract.

A company listing on the NYSE must satisfy distribution and financial standards: at least 400 North American round lot holders, at least 1.1 million publicly held shares, a $40 million float valuation for an IPO or spin-off, and either $10 million of adjusted pre-tax income across three years or $200 million of market capitalization.

It pays a flat initial listing fee of $325,000 under Section 902.03 of the Listed Company Manual. And it must certify annually that a majority of its board of directors is independent under Section 303A.01.

The governance requirement is the underrated one

Financial thresholds can be met by growing. A majority-independent board cannot be met by growing; it requires ceding control of the board to people the founders do not choose alone.

For a founder-led company this is a genuine constraint rather than a formality, and it explains part of why some businesses with ample scale to list choose not to. Staying private preserves control in a way no amount of dual-class engineering fully replicates once a company is subject to exchange governance standards.

What the Public Investor Gets in Exchange

The obligations that deter companies are precisely what protects the people who buy their shares.

• Audited financial statements, filed annually and quarterly, and downloadable from EDGAR at no cost.
• Continuous pricing from a market where the shares trade, rather than a valuation set at the last funding round.
• Liquidity. A listed position can be exited; a private one frequently cannot.
• Governance standards, including the independent-board requirement.
• Open access. No net worth or income test applies to buying a listed share.

The public float concept exists only in this world: the portion outside insider hands, priced by a market and open to any buyer.

Why Companies Stay Private Longer

The Rule 506(b) framework explains most of it without needing a theory. A company can raise unlimited amounts from accredited investors, owe them no mandated disclosure, avoid quarterly reporting, keep board composition under founder control, and skip a $325,000 listing fee plus ongoing compliance.

Employee compensation complicates the picture further. Staff paid partly in equity at a private company hold something they cannot sell, valued at a price set in a negotiation they were not part of. That is a materially different proposition from equity in a listed company, even when the headline figures look comparable.

The cost is liquidity — for the company's shareholders and employees, who hold restricted securities with no ready market. That cost eventually becomes the binding constraint, which is generally what an IPO resolves.

The trade is therefore reasonably clear on both sides: private capital in exchange for control and privacy, or public capital in exchange for disclosure and liquidity. Neither is a superior structure in the abstract.

What This Means When Reading About Private Companies

The disclosure asymmetry shapes what can honestly be said about private businesses, and it is worth keeping in mind when reading coverage of them.

Revenue figures, growth rates and margins reported for a private company originate with the company, are not audited to a public standard, and carry no obligation of consistency between one telling and the next. Nothing prevents accuracy, and nothing compels it.

Valuations require the same caution. A figure attached to a private company is the price negotiated in its most recent round, often for a tranche carrying liquidation preferences and other terms that ordinary shares lack. Multiplying that per-share price by total shares produces a number that is widely quoted and not comparable to a market capitalization.

None of this makes private companies less real or less valuable. It means the evidence available about them is of a different kind, and the habit of checking a claim against a filing does not transfer, because for most private companies there is no filing to check.

The practical test for any claim about a private company is simply to ask where the number came from. For a listed company the answer is a filing anyone can open. For a private one it is usually the company itself, relayed.

The Bottom Line

Public and private describe regulatory status, not size. A private company can raise unlimited sums under Rule 506(b), owes accredited investors no mandated disclosure, cannot advertise the offering, and issues restricted securities that cannot be freely resold.

A public company accepts audited reporting, a majority-independent board, listing standards and fees, and gets in return a market that will price and trade its shares continuously and a buyer base with no wealth test attached.

For an investor the practical consequence is straightforward. Everything you can verify about a public company is published because it must be. About a private one, you are entitled to nothing at all unless you are among the 35.

For what listing requires in detail, see the NYSE; for the figures a public company must publish, see net income and revenue.