When buying or acquiring operating companies using a Reg D 506(c) offering, investors and fund managers typically rely on one of four primary fund structures.
Because Rule 506(c) allows general solicitation (public advertising, podcasts, social media, and open marketing), it is particularly popular for emerging sponsors and searchers who need to market widely to accredited investors.
1. Single-Purpose Vehicle (SPV) / Independent Sponsor Model
- How It Works: Instead of raising a pool of capital upfront, an Independent Sponsor (also called a deal-by-deal sponsor) finds a specific target business first, secures an LOI (Letter of Intent), and then raises the equity needed for that exact company.
- Fund Structure: An LLC or LP formed specifically to buy Company A.
- Why 506(c)? Once the target company is under contract, the sponsor can publicly market the opportunity (e.g., on LinkedIn, crowdfunding platforms, or podcasts) to accredited investors looking to back that specific business.
2. Search Fund (Entrepreneurship Through Acquisition)
- How It Works: An entrepreneur (a "searcher") raises capital to buy and personally operate a single small-to-midsize business.
- Traditional Search Fund: Capital is raised in two phases—Phase 1 pays search/operating costs (~$300k–$500k), and Phase 2 raises the acquisition capital once a target is found.
- Self-Funded Search: The searcher pays search expenses out-of-pocket, then uses a 506(c) raise (plus SBA loan/debt) to fund the equity purchase once a target is under contract.
- Why 506(c)? Ideal for self-funded searchers and emerging CEOs who lack a pre-existing network of high-net-worth investors and need to advertise the acquisition equity round publicly.
3. Micro-Private Equity (PE) Buyout Fund
- How It Works: A commingled private equity pool raised upfront to acquire controlling equity stakes in multiple small businesses (typically $1M–$5M EBITDA) over a 3-to-7-year deployment period.
- Fund Structure: A traditional GP/LP (General Partner / Limited Partner) structure.
- Why 506(c)? Emerging PE managers building their First-Time Fund (Fund I) often use 506(c) to build a brand publicly and attract accredited LPs without needing warm, pre-existing institutional relationships.
4. Holding Company / "Roll-Up" Fund
- How It Works: Instead of a traditional closed-end PE fund that buys companies to sell in 5 years, a Holding Company (HoldCo) raises capital to acquire operating businesses in a specific niche (e.g., HVAC companies, software, healthcare practices) with an intention to hold long-term and compound cash flows.
- Why 506(c)? Allows the HoldCo to continuously market equity rounds as it acquires and rolls up new subsidiaries into the master company.
Comparison Summary
| Fund Type | Portfolio Size | When Capital is Raised | Primary Focus |
|---|---|---|---|
| SPV / Independent Sponsor | 1 Business | After target is under LOI | Raising capital for a specific deal |
| Search Fund | 1 Business | Before (Traditional) or After (Self-Funded) | Acquiring a company for the searcher to manage as CEO |
| Micro-PE Fund | 3–10+ Businesses | Before acquiring targets (Commingled) | Diversified buyout portfolio |
| Holding Company | Ongoing / Infinite | Continuous / Batch raises | Buy-and-hold roll-ups for long-term cash flow |