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Is Reverse Solicitation a distribution business model for fundraising generally, whether in one’s home country or overseas?

Increasingly, Alternative Investment Fund Managers (AIFMs) and Asset Managers are fundraising outside their home country to access pools of institutional capital from leading investors in foreign jurisdictions seeking unique sources of alpha.

Since 2006, Global Sales Compliance (GSC) has worked closely with AIFM/Asset Manager marketing teams to ensure compliance with cross-border marketing rules.

During nearly two decades of GSC’s bespoke marketing compliance advisory, we have investigated with our legal counsel network in 70+ countries hundreds of client queries about the sales practice called “reverse solicitation”, aka “reverse enquiry” or “passive solicitation”.

In the first of a series of blogs on the popular topic of “reverse solicitation”, we share some insights into this sales practice.

What is “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 the “initiative test”?

To confirm if a case of “reverse solicitation” is genuine (or not), regulators generally apply the “initiative test”: who/which party contacted whom first? Did the investor do their own independent research and find the fund manager to request information on the manager’s fund/service without any prior contact by the fund manager? Or did the fund manager make outreach first to the investor, taking the first initiative, by any means (phone calls, emails, video calls, etc.)?

See our blog: Reverse Solicitation: What is the “initiative test”?

Does substance matter?

Yes.   

Counsels around the globe have confirmed to us that if a fund manager has numerous, multiple and repetitive requests for information about the fund manager’s fund from the country, it is very likely that the fund manager has breached the “initiative test” and is proactively contacting investors, meaning they could be in breach of local marketing laws. Regulators generally apply the “substance test” (that is, is the reverse enquiry truly genuine?) and the “initiative test” (did the investor really contact the fund manager first at their own initiative?).

Is Reverse Solicitation a distribution business model?

No.

By definition, there is no proactive outreach by the fund manager to potential investors under the initiative test, so how can “reverse solicitation” be a distribution business model? Fund distribution implies proactive contact and marketing to potential investors. Over the years, we have actually heard the statement, “Our distribution business model is reverse solicitation” from fund managers and even third-party distributors who are paid a fee to proactively market funds to investors.

This is a rather curious phenomenon.

The regulators intended for the “reverse solicitation” practice to be a regulatory carve-out only if it is indeed genuinely unsolicited under the “initiative test”, which in practice only happens on a limited or “one-off” basis.

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