Blog
Fundraising from ‘Friends and Family’: Is this a regulatory carve-out?
26/07/2022
Our AIFM/Asset Manager Clients and prospects have asked us, “We are launching a new fund and would like to fundraise at least initially from ‘friends and family’. Since this is a relatively small group of pre-known contacts, aren’t we operating under a regulatory carve-out from local (country) marketing regulations?”
Since 2006, Global Sales Compliance (GSC) has worked closely with AIFM/Asset Manager marketing and sales teams to ensure compliance with cross-border marketing rules.
In this blog, we share our observations on the financial services industry’s perceptions and myths about regulatory carve-outs from compliance with local country marketing regulations for targeted fundraising campaigns. We are debunking these myths.
What is a regulatory carve-out?
“Regulatory carve-out” and “regulatory exemption” are sometimes used synonymously by industry players, specifically by AIFMs and Asset Managers. A regulatory exemption is an option for a waiver of marketing rules, written into local law and recognised by the local regulator, so long as compliance with the exemptions (private placement exemptions from fund prospectus registration requirements and/or licensing registration exemptions) is fulfilled.
A “regulatory carve-out” is more descriptive of industry players who believe that no laws apply to their activity because they are fundraising in their fund from a certain category of target investors, who may reside in a number of jurisdictions.
Marketing compliance myths
There are a number of industry myths about marketing compliance we have observed over two decades of experience in bespoke marketing compliance advisory. These myths -- believed by certain AIFMs or Asset Managers -- are inconsistent with the numerous legal investigations we have conducted with our 70+ law firms over two decades.
Some of the feedback we’ve heard is sourced in particular from sales teams within AIFM/Asset Managers. Many industry players believe that if they target a certain type of clients for the promotion of their fund, then no laws apply to their fund solicitation activity such as: “business-to-business” conversations or fundraising from “friends and family”.
'Friends and family' fundraising
In practice, we have observed that it is usually start-up AIFMs/Asset Managers who fundraise from “friends and family” to get initial assets into their fund in lieu of receiving seed capital from other sources. This is a method of ramping up assets in the fund so that the fund’s track record of performance can commence. As the fund’s assets under management (AUMs) grow, the fund is typically promoted to a combination of family offices, private wealth management clients as well as institutional investors across a number of jurisdictions.
Debunking the marketing compliance myths
Why do some start-up fund managers believe that when they are promoting their fund to “friends and family”, that no fund solicitation rules apply at all? Not in over two decades have we ever heard our law firm partner network in any country confirm, “if you (AIFM/Asset Manager) solicit your fund to 'friends and family', this category of investors is a complete regulatory carve-out/waiver of all fund solicitation rules in any country and no laws apply to this activity whatsoever.”
Said no law firm ever.
This is the myth we are looking to debunk. Solicitation of funds is a regulated activity and is subject to rules and regulations, which differ country by country.
See our Blog: Cross-Border Marketing Compliance: What you Need to Know
Perhaps some start-up fund managers are thinking, “friends and family” are pre-known to us and therefore any fundraising in their fund would be conducted as “Reverse Solicitation”, which is another industry myth that this sales practice is low risk.
See our Blogs: What is Reverse Solicitation? and Reverse Solicitation: What is the Initiative Test?
How you can manage your fundraising risk
Whether AIFMs/Asset Managers are fundraising in your fund from “friends and family”, family offices, private wealth management clients or institutional investors in any number of jurisdictions, this fund solicitation activity is subject to country fund marketing rules (and/or pre-marketing rules). The fact that the client targets are your “friends and family” is not a magic waiver of all fund marketing rules.
Regulatory risk is inherent to the activity of fundraising in your fund. You can still incur litigation and rescission rights risks from investors who claim that you marketed your fund to them in breach of local fund marketing rules (and investors can file complaints to the regulator increasing your sanctions risk). In practice, these scenarios typically happen when investors lose money.
See our Blog: 5-Key Distribution Risks for Cross-Border Marketing
Sales Road Maps© help AIFMs understand AIF marketing rules 24-7
Begin exploring SRMO now
Sales Road Maps Online®: “Transforming marketing compliance®”