JOBS Act

Congress passed the Jumpstart Our Business Startups Act in 2012 as part of a broader effort to stimulate economic growth. The law removed certain barriers that made it harder for emerging businesses and investment funds to raise capital. Two provisions proved particularly important for hedge fund managers.

First, the legislation directed the SEC to change its rules and eliminate a longstanding ban on "general solicitation and advertising" for private offerings. General solicitation means publicly advertising or marketing an investment opportunity, such as through websites, social media, or press releases. Under the new rules, fund managers could now engage in this public marketing, but only when all investors qualify as accredited investors. Accredited investors are individuals or entities that meet certain wealth or income requirements, indicating they have sufficient financial sophistication to evaluate investment risks.

Second, the JOBS Act raised an important threshold for hedge funds. Previously, hedge funds had to register with the SEC if they had more than 500 shareholders. The JOBS Act increased this limit to 2,000 shareholders, though no more than 500 of these could be non-accredited investors. This change gave fund managers much more flexibility to expand their investor base without triggering additional regulatory requirements.

The JOBS Act represents part of a broader evolution in the regulatory framework governing hedge funds, following the elimination of the under the . While Dodd-Frank imposed greater registration requirements on hedge fund managers, the JOBS Act provided new marketing flexibility for those willing to implement enhanced verification procedures. This regulatory evolution reflects ongoing efforts to balance investor protection with capital formation efficiency.

The SEC implemented the JOBS Act's general solicitation provisions by creating a new rule called under . This rule allows fund managers to engage in broad marketing and public advertising of their investment offerings. This differs significantly from the existing , which maintained the traditional ban on general solicitation.

The trade-off for this marketing freedom is that managers must verify that each investor actually qualifies as accredited. This requirement goes beyond simply having investors check a box saying they are qualified. Instead, the fund manager must take reasonable steps to confirm each investor's accredited status through objective evidence.

In March 2025, the SEC's Division of Corporation Finance issued important guidance that significantly simplified these verification requirements. The SEC confirmed that fund managers can satisfy the verification requirement through a streamlined approach that combines minimum investment amounts with investor representations.

Specifically, when investors commit at least $200,000 (for individuals) or $1 million (for companies or other entities), and provide written statements confirming their accredited status, this satisfies the verification requirement under Rule 506(c). Investors must also confirm that their investment funds are not being provided by third parties specifically for this investment. This guidance represented the first comprehensive interpretation of Rule 506(c) since the rule was adopted in 2013, and it fundamentally reduced the practical burden of conducting general solicitation offerings.

The JOBS Act increased the maximum number of record holders for any class of fund interests from 499 to 1,999 before Exchange Act registration becomes required. However, there is an important limitation: non-accredited investors among these 1,999 cannot exceed 500. This substantially expanded the investor base that managers could build without triggering registration requirements.

Compliance with these thresholds is determined annually as of the last day of each fiscal year. Fund managers must make a reasonable determination of whether each holder qualifies as accredited or non-accredited at that time.

Fund managers offering investments under Rule 506(c) must establish procedures to verify accredited investor status. The SEC has emphasized that simply having accurate accredited status is not enough—the manager must demonstrate that it took reasonable steps to confirm each investor's qualification.

Before the March 2025 guidance, managers typically had to gather supporting documentation such as tax returns, bank statements, or verification letters from accountants or lawyers. Many investors found this process intrusive or burdensome. The simplified approach now permitted by the SEC substantially reduces these obstacles while still maintaining the verification requirement's protective function.

Despite the marketing flexibility that Rule 506(c) provides, managers considering broad marketing should consider several limiting factors. Fund managers offering investments to both U.S. and international investors face potential complications. They must determine whether public marketing of the U.S. offering might negatively affect their non-U.S. offerings. This may require consultation with foreign legal counsel before proceeding with general solicitation.

Historically, some market participants believed that using Rule 506(c) would increase the risk of SEC examination compared to traditional Rule 506(b) offerings. They thought it might result in more intensive regulatory review. However, with the SEC's March 2025 guidance establishing clear parameters for simplified verification, regulatory expectations around documentation and procedures have become more predictable.

Fund managers should understand that the SEC's provision of explicit guidance reflects a regulatory intent to facilitate Rule 506(c) adoption rather than discourage its use through intense examination scrutiny.

Despite the marketing flexibility offered since 2013, initial adoption remained limited. Data from filings covering 2013 through 2017 showed that only approximately 4% of hedge fund offerings relied on Rule 506(c). The vast majority continued to use Rule 506(b).

This low adoption reflected various practical obstacles, including concerns about implementing sufficiently robust verification procedures, investor reluctance to provide sensitive financial documentation, operational complexity in managing both 506(c) and 506(b) offerings simultaneously, and the effectiveness of managers' existing networks and relationships for raising capital.

The March 2025 SEC guidance on simplified verification removed the primary obstacle that historically discouraged Rule 506(c) adoption. By permitting self-certification combined with substantial minimum investments rather than demanding tax returns, bank statements, or third-party verification, the SEC fundamentally lowered the operational and administrative barriers to general solicitation. Industry observers expect this simplification could materially increase Rule 506(c) utilization, particularly among managers seeking to expand their investor reach or attract broader demographics previously deterred by invasive verification procedures.

The JOBS Act created strategic choices for hedge fund managers between two approaches. Traditional Rule 506(b) offerings prohibit general solicitation but have lighter verification requirements. Rule 506(c) offerings permit general solicitation but historically required more rigorous investor verification.

The March 2025 SEC guidance has meaningfully changed this analysis. Fund managers must now weigh whether the ability to engage in general solicitation—including website postings, social media outreach, webinars, and press releases—justifies modestly higher minimum investment thresholds. Many managers previously concluded that their existing networks and relationships provided sufficient access to investors without requiring general solicitation. With simplified verification now available, this assessment may change, particularly for managers targeting new market segments or seeking to expand beyond their traditional investor base.

Managers considering Rule 506(c) should structure minimum investment commitments at or above the SEC-endorsed thresholds ($200,000 for individuals and $1 million for entities) to leverage the simplified verification pathway. They should evaluate whether general solicitation capabilities align with their fundraising strategy and ensure compliance with the SEC's if they manage registered investment adviser funds. Finally, they should maintain documented compliance procedures demonstrating adherence to the verification approach outlined in the SEC's March 2025 guidance.