Using reverse solicitation to distribute fund products to EU investors, has since the introduction of the Alternative Investment Fund Managers Directive (“AIFMD”) in 2013 remained a marketing strategy in itself for non-EU managers.
Nesbit West – Partner, CapstoneLaw
Using reverse solicitation to distribute fund products to EU investors, has since the introduction of the Alternative Investment Fund Managers Directive (“AIFMD”) in 2013 remained a marketing strategy in itself for non-EU managers. This is a by-product, among others, of a failure by the EU since to implement an effective, consistent third-country passporting regime. ESMA’s concerns around the use of reverse solicitation and its apparent distortion of the level playing field they so desperately want to safeguard for industry participants, have grown to a level where they have openly communicated (in discussion with a number of European National Competent Authorities) the view that reverse solicitation is used as a circumvention of applicable EU passporting rules. ESMA has recommended certain actions in this respect.
With the implementation of the new EU cross-border marketing rules (Directive (EU) 2019/60 and Regulation (EU) 2019/1156) (the “Cross Border Rules”)) on 2 August 2021 and the subsequent implementation thereof in local member state legislation (ongoing), the continued use of reverse solicitation as a distribution ‘strategy’ has become even more uncertain for non-EU managers.
To facilitate the reverse solicitation approach, investors are often required to sign up to representations in their underlying subscription agreements along the following lines:
“The Investor received the Offering Materials through private negotiations initiated by the Investor, and not through any general solicitation or general advertising.”
“The Investor was not offered the opportunity to subscribe for a Commitment (or otherwise invest) in the Partnership by means of any form of general solicitation or advertising. None of the General Partner or any person acting on its behalf offered to sell the Investor a Commitment by means of any form of general solicitation or advertising.”
The exact (sequence of) facts surrounding any initial information requests or general contact between the investor and GP, the subsequent exchange of information between investor and GP and ultimately the investor’s subscription to the underlying fund, deposits the above quoted non-solicitation representation in some instances into a somewhat grey legal area. This is an undesirable situation for both investor and GP. The Cross Border Rules (in certain fund jurisdictions such as Luxembourg, Germany and the Netherlands applied also to non-EU managers) have succeeded to provide more clarity on the concept of ‘pre-marketing’ of fund products and the obligation of the manager in question to formally notify a local regulator in the event of conducting such pre-marketing activities. Furthermore, the Cross Border Rules have introduced an 18-month ‘cooling-down’ period after the manager’s initial pre-marketing efforts before such manager may rely on the investor subscription as a result of a reverse solicitation effort. Legislative clarifications are generally welcomed, though are in this area forcing non-EU managers to carefully consider their legal position and strategic distribution options for the coming years especially in conducting pre-marketing activities.
Certain marketing options for unlicensed, non-EU managers to consider are:
- EU member state private placement regimes (NPPR’s) as envisaged by Article 42 AIFMD (to the extent that a member state has opted to not apply the Cross Border Rules to non-EU managers in implementing same in local legislation);
- Appointing a regulated, European hosted management company as AIFM (a number of member state regulators continue to disapprove of this construct); or
- Appointing local placement agents or intermediaries.
These options all have associated advantages/disadvantages and qualification/disclosure/reporting requirements attached. In order to make an informed decision on adopting a suitable short and mid-term distribution strategy, all these factors and their consequences have to be carefully evaluated by investment managers.
 Letter dated 17 December 2021 by ESMA Chair, Verena Ross, to the Director General of the European Commision’s Directorate-General for Financial Stability, Financial Markets and Capital Markets Union.