THOUGHT LEADERSHIP · CAPITAL MARKETS ANALYSIS

Two Paths to Raise Private Capital:

A Structural and Cost Comparison

Reg D Private Placement vs. Private Equity Fund Structure – What Issuers and Investors Should Understand

Rialto Markets, LLC  ·  Member FINRA/SIPC  ·  Registered Broker-Dealer  ·  www.rialtomarkets.com

Executive Summary

Companies and project sponsors seeking to raise private capital generally encounter two broad structural options: forming a private equity (PE) fund or conducting a direct private placement under Regulation D of the Securities Act of 1933. Each path carries distinct legal structures, operational requirements, cost profiles, and implications for both the issuer and its investors.

This paper provides an objective, side-by-side analysis of both structures across nine dimensions: capital access, investor eligibility, cost, timeline, operational complexity, tax treatment, liquidity, control, and ongoing obligations. The analysis uses illustrative figures based on a hypothetical raise of $5 million to $10 million to make the comparison concrete and actionable.

Key observations from the analysis include:

• The PE fund structure typically introduces recurring management and performance-based compensation arrangements that are generally not present in a direct Reg D placement and may affect overall operating costs.
• In certain circumstances, a Reg D Rule 506(c) offering may be launched in approximately 30–60 days, whereas private fund formation and fundraising can take substantially longer. K-1 tax reporting, inherent in most PE fund structures, adds complexity for investors that is absent in a properly structured direct placement.
• The operational burden of a Reg D placement may be substantially reduced by engaging a registered broker-dealer that coordinates compliance, escrow, KYC/AML, and transfer agent services, depending on the offering structure and service providers engaged..
• Neither structure is universally superior; the right choice depends on the issuer’s specific goals, investor base, and project profile.

1. Background: The Private Capital Landscape

Private capital formation in the United States operates primarily under exemptions from the registration requirements of the Securities Act of 1933. Two of the most commonly used frameworks for operating companies and project sponsors are:

1.1  Private Equity Fund Structure

A private equity fund is a pooled investment vehicle – typically organized as a limited partnership or LLC – in which a general partner (GP) manages the fund and limited partners (LPs) provide capital. The GP raises a defined fund, deploys it across one or more investments, and earns compensation through a management fee and carried interest. From the issuer’s perspective, the PE fund is the investor; the fund’s LPs do not hold a direct interest in the issuer.

1.2  Reg D Private Placement

Regulation D provides exemptions from SEC registration under Rules 504, 506(b), and 506(c). Rule 506(c), the most flexible for issuers seeking broad investor outreach – permits general solicitation and advertising, provided that all investors are verified accredited investors and the issuer files a Form D with the SEC. Investors hold a direct interest in the issuer; there is no fund intermediary.

2. Structural Comparison

The table below compares the two structures across key dimensions. The “Reg D via Rialto Markets” column reflects a scenario in which the issuer engages a registered broker-dealer providing integrated platform services (as described in Section 5).

Note: Certain securities may become eligible for secondary trading through a registered Alternative Trading System, subject to issuer approval, applicable securities laws, transfer restrictions, market demand, and platform availability. Liquidity is not guaranteed and may never develop.

3. Cost Analysis

Cost is one of the most material differentiators between these two structures. The following analysis identifies each cost layer, provides a typical market range, and compares the aggregate burden over a 10-year illustrative hold period on a $7.5 million raise (representing the midpoint of a $5M–$10M target).

* These estimates are based on a hypothetical $7.5 million raise and reflect assumptions regarding fund duration, management fees, carried interest, service-provider costs, investor reporting obligations, and other operating expenses. Estimates are derived from publicly available industry information, commonly observed market practices, and internal assumptions. Actual costs may differ materially.

** Fee range data is based on publicly available industry benchmarks, including the Preqin Global Private Equity Report, PitchBook Private Equity Fee Survey, ILPA Fee Transparency Initiative publications, and Probitas Partners Placement Agent Fee Surveys. Specific line item estimates for fund administration, audit, custody, reporting, and similar services are based on publicly available industry information, supplemented by the firm’s experience with comparable offerings where published data is not available. Timeline estimates are based on typical market experience and publicly available industry information and assume timely issuer, counsel, and regulatory responsiveness. Actual costs and timelines will vary materially based on fund size, offering structure, service providers, jurisdiction, transaction complexity, and negotiated terms. These illustrations are intended solely to compare general structural characteristics and are not a projection, guarantee, or recommendation, nor are they intended to suggest that any particular capital-raising structure is appropriate or superior for a specific issuer or transaction.

3.1  Management Fees

PE fund management fees typically range from 1.5% to 2.5% of committed capital annually. On a $7.5M raise over a 10-year fund life, a 2.0% annual fee compounds to approximately $1.5 million before any return on investment is generated. These fees are paid regardless of fund performance.

A Reg D direct placement does not involve a management fee to a GP. The issuer engages service providers (legal, escrow, transfer agent, broker-dealer) for defined fees, many of which are one-time or capped.

3.2  Carried Interest

Carried interest represents the GP’s share of investment profits, typically 20% above a preferred return (hurdle rate) of 6% to 8%. On a hypothetical $7.5M raise generating returns above the hurdle, carry can represent a material portion of investor upside allocated to the GP.

A Reg D direct placement does not involve carried interest. Any profits above agreed distributions flow directly to the issuer and its investors per the terms of the offering documents.

3.3  K-1 Tax Reporting

LP investors in a PE fund typically receive Schedule K-1 tax forms annually, reflecting their allocable share of fund income, gain, loss, deduction, and credit. K-1s are often issued late in the tax year, complicating investor tax preparation, and may generate unrelated business taxable income (UBTI) for tax-exempt investors.

In a properly structured Reg D direct placement (where investors hold securities directly rather than partnership interests in a fund), investors may receive Forms 1099 or other tax reporting documents depending on the structure of the issuer and securities offered.

4. Operational and Timeline Considerations

4.1  Time to Market

Forming a private equity fund typically involves drafting and negotiating a limited partnership agreement (LPA), private placement memorandum (PPM), subscription documents, and side letters; establishing the fund entity; engaging a fund administrator; and completing a fundraising roadshow with institutional LPs. This process commonly requires 12 to 18 months, and in some cases longer.

A Reg D private placement under Rule 506(c) requires preparation of offering documents (PPM and subscription agreement), a Form D filing with the SEC within 15 days of the first sale, and state blue-sky notice filings. With experienced counsel and appropriate service providers, this process can often be completed in 30 to 60 days.

4.2  Ongoing Obligations

PE fund sponsors face ongoing obligations including annual audited financial statements (typically required by LP agreements), annual K-1 preparation, LP reporting (quarterly or semi-annual letters), LP advisory committee (LPAC) governance, and fund administrator coordination. These obligations persist for the life of the fund, which commonly extends 10 to 12 years.

Reg D issuers generally have comparatively limited ongoing SEC reporting obligations (absent a broker-dealer’s requirements or LP demands for audited statements). Ongoing obligations primarily consist of maintaining accurate investor records, transfer agent functions, and any contractual reporting to investors under the offering documents.

4.3  Investor Relations

In a PE fund structure, the GP is the primary relationship manager for LPs. The issuer (portfolio company) may have limited direct contact with the fund’s LPs. This intermediation can reduce the issuer’s ability to communicate directly with capital providers.

In a direct Reg D placement, the issuer maintains a direct relationship with each investor. This may enable more efficient communication between issuers and investors and may provide issuers with a deeper understanding of the investor base.

5. The Role Rialto Markets as an Integrated Capital Markets Platform

Historically, one practical disadvantage of the Reg D direct placement path was the operational complexity of assembling and managing multiple service providers: securities counsel, a broker-dealer of record, an escrow agent, a KYC/AML provider, an accreditation verification service, a marketing platform, and a transfer agent. Coordinating these parties introduced cost, delay, and compliance risk.

Rialto Markets, as the registered broker-dealers provides or coordinates an integrated suite of capital markets services – combining securities offerings infrastructure, third-party escrow and payment rails, KYC/AML, accreditation verification, investor portal, and affiliated transfer agent functions under a single platform – which can reduce this complexity. Key potential advantages include:

• Single contract and SLA, reducing vendor coordination overhead
• Integrated compliance workflow, designed to help coordinate KYC, subscription, and funding steps which may help reduce operational gaps between these processes.
• Native transfer agent and cap table management, eliminating post-close reconciliation delays
• Consistent data chain of custody across all investor and capital flow records
• Can provide potential cost reduction relative to engaging each function separately

6. Hypothetical Scenario: A Mid-Market Media Project

To illustrate the analysis in a practical context, consider a hypothetical independent production company – referred to here as “Studio X” – seeking to raise $7.5 million to finance a slate of entertainment projects. Studio X has a defined investor audience (high-net-worth individuals and family offices familiar with the entertainment sector) and wishes to maintain creative and operational control.

6.1  The PE Fund Path (Hypothetical)

Studio X approaches a boutique PE firm to raise a dedicated fund. The PE firm agrees to target $7.5M from accredited LPs. Key structural terms:

• Management fee: 2.0% per annum on committed capital
• Carry: 20% above an 8% preferred return, 100% catch-up
• Fund life: 7 years (plus 2-year extension option)
• Investor minimum: $500,000
• K-1s issued annually; audited financials required
• Estimated fund formation timeline: 12–18 months

Over a 7–10 year fund life, illustrative fees and costs on this structure are estimated at $3.5 million to $5+ million (see Section 3). Studio X cedes partial governance to an LP advisory committee and has limited direct contact with the fund’s investors.

6.2  The Reg D Rialto Markets Platform Path (Hypothetical)

Studio X instead engages a registered broker-dealer to conduct a Rule 506(c) offering directly to verified accredited investors. Key structural terms:

• Investor minimum: $250,000
• Investor type: Qualified accredited investors only (506(c) verified)
• General solicitation permitted to accredited investors
• Integrated platform services: facilitation of escrow, KYC/AML, portal, affiliated transfer agent
• Estimated time to launch: 30–60 days post-document completion
• Tax reporting: 1099 (entity-dependent); tax reporting obligations depend on the offering structure and applicable tax treatment

Illustrative all-in costs on this structure are estimated at $400,000 to $600,000 (see Section 3 and assumptions). Studio X retains full operational and creative control, maintains direct investor relationships, and has no ongoing management fee or carry obligation.

7. Considerations and Risk Factors

Neither structure is without risk or complexity. The following considerations are relevant to any issuer evaluating these paths:

7.1  Regulatory Compliance

Both structures require strict adherence to applicable securities laws. Rule 506(c) requires that all purchasers be verified accredited investors; failure to verify can result in loss of the exemption. Form D must be filed within 15 days of the first sale. State blue-sky filings may be required. Issuers should engage qualified securities counsel.

7.2  Investor Suitability

Reg D offerings are restricted to accredited investors (and, under 506(b), up to 35 sophisticated non-accredited investors). Issuers should not assume that “accredited” status alone means an investment is suitable for a particular investor. Broker-dealers have independent obligations under applicable FINRA rules.

7.3  Liquidity Risk

Private securities are generally illiquid. ATS-enabled secondary trading may provide a mechanism for liquidity but does not guarantee it. Investors in private placements should be prepared to hold their investment for the full term.

7.4  No Guarantee of Success

Neither a PE fund structure nor a Reg D placement guarantees that a capital raise will be completed, that the underlying project will succeed, or that investors will receive a return of or on their investment. Past performance of similar structures or projects is not indicative of future results.

7.5  Cost Estimates Are Illustrative

All cost figures in this paper are illustrative and directional. Actual fees will depend on the specific service providers engaged, the complexity of the offering, legal jurisdiction, and negotiated terms. Issuers should obtain firm quotes from all service providers before making structural decisions.

8. Conclusion

The choice between a private equity fund structure and a direct Reg D private placement involves meaningful tradeoffs across cost, timeline, operational complexity, investor relationships, and tax treatment. For issuers who value control, speed to market, direct investor relationships, and who determine that a potentially lower aggregate cost structure, is appropriate for their circumstances, a Rule 506(c) private placement supported by an integrated broker-dealer platform offered by Rialto Markets may warrant serious consideration alongside the traditional PE fund path.

This analysis does not advocate for a specific structure for any particular issuer. Each situation is unique, and the appropriate structure depends on the issuer’s specific circumstances, project profile, investor base, and professional advisors’ guidance.

Rialto Markets publishes this analysis as part of its commitment to transparency and issuer education in the private capital markets. Issuers and investors are encouraged to engage qualified legal, financial, and tax counsel before making any decision.

Disclosures and Regulatory Notice

Broker-Dealer Registration

Rialto Markets, LLC is a registered broker-dealer with the U.S. Securities and Exchange Commission (SEC) and a member of the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC). Registration with the SEC and membership in FINRA does not imply a certain level of skill or training.

No Offer or Solicitation

This document is for informational and educational purposes only. Nothing in this document constitutes an offer to sell, a solicitation of an offer to buy, or a recommendation regarding any security or investment product. Any such offer or solicitation will be made only by means of definitive offering documents, in compliance with applicable federal and state securities laws, and solely to investors who meet applicable eligibility requirements.

Forward-Looking Statements and Projections

Certain statements in this paper, including cost comparisons and illustrative scenarios, involve estimates, assumptions, and projections. These are provided for discussion purposes only. Actual results, costs, and timelines may differ materially from those illustrated. No representation is made that the scenarios described are achievable, typical, or applicable to any specific offering. Recipients should not rely on these figures as predictions of future outcomes.

Third-Party Information

References to market rates, industry benchmarks, and third-party fee structures (including those attributed to publicly reported fund terms) are drawn from publicly available sources believed to be reliable, but are not independently verified by Rialto Markets. Such information is subject to change and may not reflect current market conditions.

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