When you first learn you can invest retirement savings into alternative assets, you may be filled with excitement and curiosity. How does it all work? How is it similar to more commonly known public markets, and how is it different? While there are many things to note in both categories, one of the most commonly cited key differences between public markets and private market alternatives is how they’re regulated differently.
As Alto works to bring alternatives to individual sophisticated investors, we work tirelessly behind the scenes to ensure that the investors on our platform are able to source and close their chosen investments with the same confidence that comes from participating in a tightly run, compliant transaction process that institutional investors have long been able to enjoy.
Historically, in alternative asset investment deals, issuers engage teams of compliance officers, lawyers, and advisors to establish and maintain regulatory best practices. Those actions kept issuers and service providers in good standing with authorities and capital allocators. In the new investment environment where individuals deploy their own retirement savings, investors are increasingly conducting their own due diligence and tackling more complex deals, so it’s important to put their trust in firms that maintain high levels of transparency.
“You want to make sure you are doing everything you can to be compliant, run a clean shop, and keep everything above board, then, you can be sure that regulators don't have any concerns about the lines of business you're operating.”
Brian Fraioli,
Chief Compliance Officer at Alto Securities
Brian himself has handled some of the most common regulatory hurdles investors and fundraising entities historically faced. He recently explained how Alto acts as a conduit for the emerging wave of issuer-investor relationships by solving challenges on behalf of both parties.
Navigating the seemingly ever changing regulatory landscape for alternative asset investments requires deep knowledge and accurate orientation to the right context.
When you invest in an alternative asset on a platform like Alto, the issuers you select must comply with long-established regulations as they are amended and new rules are adopted to protect investors and keep up with innovation.
Alto’s compliance team works around the clock to interpret the regulatory context underlying laws that govern investments into complex alternative assets, and how they apply to issuers. We appreciate the logic behind them.
"Understandably, these assets have been gated or walled off for specific reasons, it has to do with the complex nature of the offerings and the transactions.”
Brian Fraioli,
Chief Compliance Officer at Alto Securities
Consider, for example, the Jumpstart Our Business Startups Act (JOBS Act), which opened the door for non-accredited individuals to invest in early-stage companies or private entities and other alternative investments.
In the same spirit of protecting individual investors from low-quality (or even predatory) offerings, the Securities and Exchange Commission (SEC) didn’t simply open the floodgates to all alternatives; it allowed new entrants to dabble and learn.
“That’s why the SEC started with crowdfunding, where you could get your first taste of what an early-stage company could do,” says Brian. “And they put income limits so you can put only a portion of your income into this type of investment.” The intended result is an increasingly sophisticated and experienced retail investor community that can grow slowly and sustainably while collectively maturing in financial savviness.
From attending industry events to participating in professional peer forums, Alto’s compliance team stays aware of key regulatory standards and emerging developments on our investors’ behalf.
Let’s take a look at a specific example from Alto’s suite of offerings to better understand how Brian’s team works. On Alto Marketplace, the Securities team curates exciting opportunities in leading, unique, managed funds across a range of criteria. One of those key criteria is an assessment of an issuers’ compliant operations against the risks and potential value of their offering. This holistic due diligence process is foundational work in the alternatives sector, and Alto’s Marketplace investors can invest knowing that it’s being done by professionals on these opportunities.
Finance professionals (especially in compliance departments) know that regulations of alternatives are there for good reasons. Alternative investment deals are extremely difficult to assess, and carry significant risks. It’s a critical fact of alternatives: due to their highly speculative and risky nature, an investor could theoretically ruin themselves financially if they participated in the space without the proper education, self-awareness, and restraint needed in light of their unique financial situation.
To help you avoid those pitfalls, Alto’s compliance group translates its deep knowledge of those complexities into action, discerning which issuers can list on Marketplace for discoverability by Alto’s investor base. The Marketing team then translates that sourcing logic into everyday, regulatory-compliant English so investors can get a better handle on the risks and commitments that accompany any potential value creation. The loop closes with Alto’s Investor Relations team, who engage directly with the issuers and dig into the offering documents to provide white glove support to prospects on Marketplace deals.
“We sort through the various companies that come to Alto to raise money, and we conduct thorough due diligence to prevent exposing investors to excessive risk through fraud, negligence, missteps, or other foreseeable problems.”
Brian Fraioli,
Chief Compliance Officer at Alto Securities
Brian’s team administers background checks on management teams, reviewing the entity’s current contracts and partner relationships for conflicts of interest.
This task is tricky because passing due diligence is not an endorsement of the issuer’s business or an indicator of performance or future prospects.
“One of the first things nearly every investor asks is, ‘What’s the return on a particular investment?’ Because that’s how investors measure most investment opportunities today,” Brian explains. “But in alts, we don’t have that luxury.”
Instead, Alto works to identify experienced fund managers who have led deal teams through volatile markets or economic expansion. In other words, these fund managers have a track record of backing companies that drive value and innovation in their sectors. “And then we tackle the challenge of marketing our findings without being exaggerated or too exuberant… because we love our issuers,” Brian explains. “Remember, we pick them because we believe in them.”
Based on the team’s decision, Alto then translates and communicates what issuers propose in their offering documents.
Together, these communications help light the way for individuals who want to leverage retirement capital and allocate it toward alternative assets.
“A big part of what we communicate is the offering documents and subscription documents. What is the investor actually agreeing to? What are they getting? Are they getting ownership? Are they getting licensing? Are they getting continued revenue? What is it that the investor is signing up for? We decipher and communicate these considerations so investors can continue with their own due diligence and selection process.”
Brian Fraioli,
Chief Compliance Officer at Alto Securities
To ensure Alto’s compliance work endures and evolves along with the changing investment landscape, Brian and the rest of Alto’s leadership team regularly connects with governing officials. The relationships they foster helps the whole team gain insights into regulatory pitfalls and best practices. These insights help Alto work more effectively both on its own and hand in hand with issuers for the institutional stakeholders on our platform to verify and demonstrate compliance with regulations, which in turn further reassures investors who may want to participate in alts.
Brian says this work is mutually strategic and rewarding. “There are some great people in the teams over there that will tell us, ‘Here’s an area of focus for us currently, or we will be focused on this during the next exam cycle’” he says. “So we can ensure we’re buttoned up on all the regulatory issues. I find that keeping this open and honest dialogue with regulators is the most proactive way to have a compliant firm.”
But the benefits go beyond staying out of trouble. An ongoing relationship with regulators helps investors by generating a firm-wide reputation of working in the best interest of individual investors.
Alto and firms like it operate on “the edge of the trade,” meaning they are the last stop before the execution of transactions. This is a time and place where risk enters the system, so the proper controls must be in place. Innovation can sometimes outpace regulation here, so compliance teams must be aware of new technology or investment products, understand how their firms intend to deploy them, and know what regulations apply. Unfortunately, the bad actors also see innovation as an opportunity to take advantage of unsuspecting investors. So, it is important to be vigilant about who you do business with and for investors to conduct their own due diligence. Ongoing dialogue on behalf of investors and issuers is one way Alto’s team stays on the positive side of these interactions and builds a reputation for compliant value-creation.
In the past, individuals might have had the unfortunate experience of finding an issuer of an alternative opportunity they wanted to invest in, only to find that it lacked the technology to make the process smooth. With Alto, individuals can invest in alts using retirement funds more easily, because the technology enables scalable transaction workflows.
Alto’s technology and team help facilitate the capital raise through marketing, investor support, and other administrative functions, allowing the issuer to focus on growing their business. Founders and fund managers can get distracted by the need to raise money constantly, which can take them away from their day-to-day jobs, which is not ideal for success.
“We’ve streamlined the process and created an API that our partners can use, too,” says Kali Mon., VP of Research and Analysis at Alto. “To envision it, think about a checkout process that appears to be seamless for the end user, the investors.”
Investing in alts with IRA funds has long been tedious, difficult, and time consuming. Adhering to regulatory requirements with human time and energy has been too resource-intensive, considering the amount of paperwork and documentation necessary. Now though, technology is making it easier, so investors will increasingly interface with better-resourced issuers who are more open to taking IRA funds for alts.
This change is especially evident in deals where the people involved were inaccessible or disorganized. Remember that, as with many industry-wide innovations, early processes can sometimes feel scattershot or “made up” due to a lack of established operating procedures. In an increasingly consumer-friendly tech enabled age, this old status quo will no longer fly.
Smart regulation can help drive the adoption of alternative assets as a trusted asset class for retirement accounts. But it can also unfortunately feel like a barrier to entry. For example, when Alto’s founder and CEO, Eric Satz, first tried to invest in alts using his retirement savings, he found the demands of regulatory compliance to be a seemingly impenetrable barrier.
“A big part of what we communicate is the offering documents and subscription documents. What is the investor actually agreeing to? What are they getting? Are they getting ownership? Are they getting licensing? Are they getting continued revenue? What is it that the investor is signing up for? We decipher and communicate these considerations so investors can continue with their own due diligence and selection process.”
Eric Satz,
Founder and CEO of Alto
“The first challenge I faced was regulatory,” he recalls. “You had to have a certain net worth or annual income to participate, and the lowest level was in the millions.” This experience highlighted an opportunity to build a team of investment experts and proactively help other individuals find their entry point into compliant alternative asset investing.
For a trust company, custodian, brokerage, or any other investment service provider, a proactive approach to compliance promotes understanding, enables clear communication, supports ongoing relationships with regulators, and even steers tech adoption.
Investors and issuers alike often question evolving laws, why certain regulations exist, and how to operate within compliance. Meanwhile, regulators, on the other side, want to communicate clearly with issuers and investors alike. Alto’s team helps bridge this gap.
It is our opinion that in the future, the alts will be seen more and more like traditional markets through accessibility, operational efficiency, and corporate transparency. But it all starts and ends with compliance.
Learn how Alto Securities navigates capital markets from its Chief Compliance officer, Brian Fraoli.
Alto's Founder & CEO Eric Satz recounts our origin story and the problem we're solving for the alternative assets space.
Learn from Kali Mon, Alto's VP of Research & Analysis, how we support issuers of alternative assets in building strong relationships with investors.
Hear from Ryan Kirchner, Alto's Director of Investor Relations on how he and his team drive alternative investments for Alto users.
Scott Harrigan, Alto's President and CEO of Alto Securities, explains what we do, and who can benefit from our work in alternatives investing.
Kacie Connors, Director of Issuer Relations, unpacks Alto's relationship building with issuers of alternative assets.
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