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Is Reverse Solicitation a Safe Harbour (regulatory exemption)?
Since 2006, Global Sales Compliance (GSC) has worked closely with AIFM/Asset Manager marketing teams to ensure compliance with cross-border marketing rules.
Many clients have asked us, “If we operate via 'reverse solicitation' in any country, is this practice a safe harbour?" AIFMs/Asset Managers want to understand that if they do accept a subscription from an investor in their fund which came about through an inbound enquiry via reverse solicitation, is the AIFM/Asset Manager effectively operating under a regulatory exemption from the country marketing rules. Are they “safe” from the 5-key distribution risks (sanctions, litigation, investor rescission rights claims, business franchise and reputation risks)?
During nearly two decades of GSC’s bespoke marketing compliance advisory, we have investigated hundreds of client queries with our legal counsel network in 70+ countries the sales practice called “reverse solicitation”, aka “reverse enquiry” or “passive solicitation”.
In the second of a series of blogs on Reverse Solicitation, we share some insights into this sales practice. (Read our first post in the series: What is Reverse Solicitation?)
Understanding Reverse Solicitation
Reverse solicitation is a sales practice whereby the potential investor contacts the fund manager (AIFM/Asset Manager) and requests information on the fund manager’s fund (or financial services) on an unsolicited basis. This sales practice was intended by the regulators to be an example of a carve-out to local regulations on solicitation of financial products or services so long as the contact with the investor was genuinely unsolicited by the fund manager.
What is a regulatory exemption?
Many AIFMs/Asset Managers who market their funds cross-border, fundraising from overseas investors generally always seek out regulatory exemptions in each jurisdiction from the requirement to register their fund prospectus with the local regulator as well as licensing exemptions from the requirement to register for a securities dealing license. Typically, regulatory exemptions require the marketer to target a specific set of investors such as “Qualified Clients”, “Professional Investors”, “Professional Clients” or other nomenclature as well as follow certain marketing practices.
Is Reverse Solicitation a Safe Harbour (a regulatory exemption)?
In our investigation of private placement exemptions in various countries across the globe, we have found a few countries who list Reverse Solicitation alongside their existing exemptions, such as Switzerland and United Arab Emirates.
As a sales practice, reverse solicitation must be genuine (meeting the “substance test” and “initiative test”) and backed up by proof of documented evidence to the compliance file. Reverse Solicitation cannot be an AIFM/Asset Manager’s distribution business model.
But even then, if the AIFM/Asset Manager is ever challenged by the regulator and/or the investor with litigation, to use the argument of reverse solicitation is not a bulletproof strategy. That means it incurs risk.
Reverse Solicitation generally is not a safe harbour.
We advise clients to focus on compliance with cross-border marketing rules at all times and only use reverse solicitation (in genuinely unsolicited circumstances) on a very limited, one-off basis to mitigate the 5 key distribution risks for cross-border marketing.
See our blog: 5-Key Distribution Risks for cross-border marketing
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