Recent legislative measures in Europe made reverse solicitation of investment funds more complex to enforce. At least that is what it seems from the surface. Many have heard of AIFMD premarketing just introduced under the Crossborder Distribution of Investment Funds Directive.  

Not as many have looked so far at reverse solicitation and the inversely proportional relation it has with the concept of marketing of investment funds. In simpler terms, for reverse solicitation being at its core a case of non-offer, by defining the concept of marketing and offer of investment funds into more details we shape conversely the scope for reverse solicitation. AIFMD premarketing is just an additional nuance to the concept of marketing and its introduction gave a better contour to reverse solicitation.  

As we live in an era when social media is increasingly used as a distribution channel and where the same logics of the economy of the attention apply also to the offer of investment products, we can conclude that reverse solicitation is not over with the advent of AIFMD premarketing. It just happens in a different formula.  

Demystifying Reverse Solicitation 

Reverse solicitation has been the obsession of many since AIFMD entered into force. Yet, little over a decade since the directive was first introduced, there seems still to be misconceptions surrounding reverse solicitation. The most common misconception from fund managers is that reverse solicitation is something that they can actively do. Something akin to an alternative type of marketing strategy, entailing a disguised element of sale of an investment product.  

Reverse solicitation is an uncodified principle or mechanism, whereby the rules of the offer of investment services and products do not apply in cases where no offer of these services or products is being actively made to investors. Instances of reverse solicitation do exist, but true cases of reverse solicitation are increasingly more exceptional nowadays. These coincide with an investor expressing an interest in learning more and potentially buy in certain investment services or products without having been solicited in any way by the offeror explicitly about these services or products.  

With the advent of AIFMD a paradigm shift took place in the offer of investment funds, which changed for good the way in which investment funds are offered to investors in Europe. As part of this shift, the approach to reverse solicitation has evolved.   

Reverse solicitation and marketing under AIFMD 

AIFMD introduced for the first time a reference to the concept of reverse solicitation. Recital 70 of the directive states that its provisions should not affect the current situation, whereby a professional investor, domiciled in the European Union, may invest in AIFs at its own initiative and irrespective of where the AIFM and/or the AIFs are domiciled. At the same time, closing the gap that existed on the notion of marketing in the European regulation on financial services, AIFMD also introduced for the first time a definition of marketing that was valid at European level. Using the same dichotomic approach that we see adopted elsewhere in the regulation on financial services in Europe, AIFMD defined the two ends of the spectrum for what concerned the offer of alternative investment funds in Europe. Reverse solicitation and marketing. The reason why that was the case lies in that AIFMD also introduced for the first time the concept of marketing authorisation for alternative investment funds. Considering that until then there had been no need to request for a marketing authorisation for the offer of alternative investment funds, it became then necessary to ensure clarity around the activities that would have triggered the requirement to obtain such marketing authorisation.  

Closing the gap on Premarketing 

The limits of the dichotomic approach for what concerns the marketing of alternative investment funds are clear. By defining the two opposite ends of the spectrum – reverse solicitation and marketing – a gap remained for anything in between. And this gap has always been prone to be exploited in ways that later circumvented the application of AIFMD.  

This is the case of premarketing. A very common practice in the alternative investment funds world, whereby fund managers would typically test with perspective investors interest and appetite for certain strategies before proceeding with the launch of the vehicle to host the strategy. This practice also finds its justification in that most of the time the main terms of an alternative investment fund structure are finalized based on the preference expressed by anchor investors. The premise behind premarketing is simple in that for there not being an established or launched fund at the time when approaching investors, there cannot be marketing. Accordingly, managers would purport that any subsequent subscription in the fund to be established or launched was because of reverse solicitation on the part of the anchor investors. At least that was the case before AIFMD premarketing was introduced with the Crossborder Distribution of Investment Funds Directive.  

A product of the Capital Markets Union, the new directive provided welcome clarifications on the concept of marketing under AIFMD. On the one hand, it tackled the aspect of the marketing communications related to investment funds, with a mandate for ESMA to issue guidelines on the topic. On the other, it added one more layer of formalities in the context of marketing itself, with the introduction of a concept of AIFMD premarketing. It is noteworthy to mention that the concept of premarketing was not necessarily new and it existed already in some EU member states. A notification requirement is now introduced to allow for supervisory authorities to monitor the activities of managers engaged in AIFMD premarketing. The notification will not be required ex-ante but within a period of two weeks from commencement of the AIFMD premarketing activities instead. It shall be addressed to the home state authority of the EU AIFM. The notification shall specify in which EU member states the activities have been or will be carried out, related time periods as well as a list of the AIFs or compartment thereof presented to investors. The home state authority of the AIFM will then liaise directly with the corresponding authorities of the EU member states concerned by the AIFMD premarketing activities and with the EU AIFMs in case additional information is requested on such activities by any of those authorities.    

The newly introduced notion of AIFMD premarketing ensures that managers can still approach investors with their ideas or strategies and that the ability to tailor the terms of the offer to the preference of anchor investors is maintained. No reverse solicitation can be claimed for a period of 18 months from the said notification and the related premarketing activities. Subscriptions in the funds object of premarketing can take place for those 18 months only after the fund has been authorised for marketing.   

 A Snapshot of AIFMD Premarketing  

ESMA Guidelines on Marketing Communications 

The Cross Border Distribution of Investment Funds Directive contributed to closing the gap even further on the European notion of marketing investment funds with the mandate issued to ESMA to introduce guidelines on marketing communications. The guidelines for the first time establish a European-wide discipline on a topic that had been entirely a local affair in the past. Where the notion of AIFMD premarketing helped closing the gap on the grey area between reverse solicitation and marketing, the new guidelines contribute to define into more details the notion itself of marketing investment funds.  

The ESMA guidelines on marketing communications offer a list, valid at European level, of the type of communications that can and cannot be considered marketing. And where there is no longer a grey area on the notion of marketing communications, we now have a list of exclusions to that notion, which is something that we did not have before. On the point of the exclusions, it is noteworthy to mention that corporate communications broadcast by a fund manager, to either describe its activities or recent market developments and which do not refer to a specific UCITS or AIF or a group of UCITS or AIFs are excluded from the concept of marketing communications. That is unless the activities of the fund managers are limited to one fund or a small number of funds implicitly identified in such corporate communications. Here we have a new principle, valid at European level, whereby fund managers can freely market their abilities. It is noteworthy to mention that this was an approach already adopted in Germany, where local custom and practices are very sophisticated on the concept of marketing investment funds. On this point, German authorities are inclined to support an official narrative whereby what cannot be considered marketing or premarketing could as well be reverse solicitation. Marketing of the abilities is easier said than done though and it requires particular attention for what concerns any mention to official investment strategies adopted by specific managers, which would amount to premarketing.   

Conclusions 

Many would argue that it takes more to sell a fund than merely talking about the abilities of its manager. This argument is based on the misconception whereby reverse solicitation is selling a product or a service in disguise. When looking at the big picture of the regulatory framework for financial services as it has been revised, the avenues for reverse solicitation are much narrower but also much more defined. The rest is a matter of getting attention.