Alternative Assets and the ‘Average’ Accredited Investor Installment #3

Overview of the Jumpstart Our Business Startups Act of 2012

If you are not a Wall Street or Silicon Valley attorney, fund manager, CEO, or entrepreneur, you probably don’t really understand the Jumpstart Our Business Startups Act of 2012 (the ‘JOBS Act’). This installment will explain what every accredited investor needs to know about the JOBS Act, as well as recent guidelines designed to strengthen its impact on private offerings.

In essence, the JOBS Act was designed to do two things:

1. To open up the public capital markets to those smaller companies wanting to go public by easing certain regulatory requirements associated with being a public company.
2. To enlarge the private capital markets by making it easier for entrepreneurs, companies, private equity funds, venture capital funds, hedge funds, and any other issuer of securities (all of whom we’ll refer to as ‘issuers’) to reach out to potential investors, raise capital and, in the case of private companies, to choose to remain private for a longer period of time or even indefinitely.

In many ways, the JOBS Act is a remarkable piece of legislation. From introduction through enactment, it took less than four months to pass through both the House and Senate (quite a feat in and of itself), and it was signed into law by President Obama on April 5, 2012.

Even more notable, weighing in at a mere 22 pages, the JOBS Act embodies some of the most significant changes to private capital formation since the federal securities laws themselves were first enacted in 1933.

Its adoption was not without controversy, however. The JOBS Act has been characterized as everything from a welcome attempt at uncuffing capitalism to the equivalent of a ‘Bring Fraud Back to Wall Street Act.’

A Word About Federal Securities Laws and Private Capital Formation

Before it’s possible to really appreciate the changes that the JOBS Act has brought and will continue to bring to the private capital markets and to alternative investment opportunities, it’s important to consider how private capital formation functioned in the context of the pre-JOBS Act securities laws.

By way of background, the US stock market’s infamous 1929 crash marked the end of an eight-year bull run. Three years later, when the market finally bottomed, the Dow Jones Industrial Average had lost a staggering 89% of its value. In that same year, at the height of the Great Depression, the US Senate Banking Committee launched an investigation into the causes of the 1929 crash and how to prevent similar crashes from occurring in the future.

The Committee’s findings ultimately led Congress to enact the first US federal securities law: the Securities Act of 1933 (the ‘Securities Act’).

In essence, the Securities Act requires all offers and sales of securities to either be registered with the SEC, or be exempt from registration pursuant to one of the enumerated exemptions available under the Securities Act.

By far the most commonly utilized exemption from Securities Act registration is the private offering exemption afforded by the safe harbor of Rule 506 of Regulation D, promulgated under Section 4(a)(2) of the Securities Act.

Historically, Rule 506 of Regulation D, one of a number of registration exemptions promulgated by the SEC under the Securities Act, allowed issuers to raise an unlimited amount of capital from an unlimited number of accredited investors and up to 35 sophisticated non-accredited investors (provided that, when sophisticated non-accredited investors participated in an offering, certain information disclosure requirements were met).

However, as Rule 506 was a private offering exemption, issuers were prohibited from engaging in any type of general solicitation or general advertising. As a result, an issuer raising capital in a private offering under Rule 506 could only solicit investments from potential investors with which the issuer (or an intermediary such as a paid placement agent or investment bank) had a pre-existing, substantive relationship.

This effectively limited the pool of potential investors to those already within an issuer’s (or intermediary’s) existing network. It furthermore limited participation in alternative assets to those private offerings being conducted by issuers, or through intermediaries, with which investors had a pre-existing, substantive relationship.

The JOBS Act’s Impact on Private Offerings

Under the JOBS Act, the SEC was required to eliminate the prohibition on general solicitation and general advertising for private offerings that are made in reliance on a new subsection of Rule 506. Under Rule 506(c), issuers are permitted to make general solicitations and general advertisements, provided that:

1. All of the purchasers of an issuer’s securities are accredited investors; and
2. The issuer had taken reasonable steps to verify this.

The SEC subsequently enacted rules and amendments to implement this change, and they came into effect on September 23, 2013.

In theory, this meant that a nearly endless array of opportunities to invest in alternative assets could now be advertised using all manner of media from ads on billboards to radio, television, and social media.

In practice, however, the rule fell short of its purpose to encourage private capital raising.

This is because Rule 506(c) requires issuers to take “reasonable steps to verify” that all purchasers of their securities meet the definition of accredited investor. The rule sets out the following “non-exclusive and non-mandatory methods” for issuers to verify whether a person is an accredited investor:

• Reviewing tax forms for the prior two years to assess whether an investor meets the income threshold.
• Reviewing bank statements, brokerage statements, other statements of securities holdings, certificates of deposit, tax assessments, independent appraisal reports, and credit reports from the prior three months to assess whether an investor meets the net worth threshold.
• Obtaining written confirmation from a broker-dealer, investment adviser, attorney, or accountant as to the investor’s qualification.

The issuer must also not have knowledge that the investor is not an accredited investor.

Following these verification methods presented an administrative burden on fund managers. Asking investors to divulge their income and portfolio was also seen as intruding on their privacy.

While this list is not exhaustive, uncertainty over which other methods would be considered ‘reasonable’ led to issuers staying close to the specified methods for verification. As such, in the wake of the JOBS Act, most private funds and other capital seekers still marketed to their existing investors instead of using public advertising to attract a wider pool of investors.

A Broadened Verification Process for Accredited Investors

On March 12, 2025, the SEC issued new guidelines that simplify the process for verifying whether an investor has accredited investor status.

Under its new guidance, issuers will have taken reasonable steps to verify their investors if the investors:

1. Meet a minimum investment amount of $200,000 for natural persons and $1 million for public entities.
2. Provide written representation that:
   • They are an accredited investor.
   • Their investment here is not funded by a third party for the purpose of that particular investment.

The issuer must also not have actual knowledge of any facts that would indicate the investors’ representations were not true.

This new guidance drastically reduces the burden on fund managers and other capital seekers to perform thorough verification checks on investors by simplifying verification and shifting the responsibility to investors to self-report. It also offers issuers greater confidence in compliance with Rule 506(c), thus encouraging general solicitation and general advertising to attract a wider pool of accredited investors.

[Editor’s Note: We think you may also be interested in “Facebook Is a Bad Investment Advisor.”]

Read More

While we encourage you to read this series in order, you certainly don’t need to. Each installment is designed so it can be read as a stand-alone article. Here they are in case you want to skip around:

• Alternative Assets and the ‘Average’ Accredited Investor Installment #1: Who Is This Series For?
• Alternative Assets and the ‘Average’ Accredited Investor Installment #2: Meet Bob, Michele, David, and Isabella
• Alternative Assets and the ‘Average’ Accredited Investor Installment #3: Overview of the Jumpstart Our Business Startups Act of 2012
• Alternative Assets and the ‘Average’ Accredited Investor Installment #4: Overview of the Alternative Assets Landscape
• Alternative Assets and the Accredited Investor Installment #5: Crowdfunding & Rewards-Based Beginnings
• Alternative Assets and the Accredited Investor Installment #6: Equity Crowdfunding Under Regulation D
• Alternative Assets and the Accredited Investor Installment #7: Crowdfunding Under Title III of the Jobs Act
• Alternative Assets and the Accredited Investor Installment #8: Venture Capital & Angel Investing
• Alternative Assets and the Accredited Investor Installment #9: Venture Capital Investing
• Alternative Assets and the Accredited Investor Installment #10: Private Equity, aka PE Investments
• Alternative Assets and the Accredited Investor Installment #11: Investments in Hedge Funds
• Alternative Assets and the Accredited Investor Installment #12: Tangible Investments

Who are ‘We’?

You will notice that throughout this series, I use the term ‘we.’ This is done to acknowledge the great editorial assistance of the Financial Poise Editorial Team. This series is based on my book The Investor’s Guide to Alternative Assets: The JOBS Act, “Accredited” Investing, and You.

This article was originally published on March 1, 2019.

©2025. DailyDAC^TM, LLC d/b/a/ Financial Poise^TM. This article is subject to the disclaimers found here.