Fundraising is the lifeblood of any firm and the temptation is great to hop on a plane to land that big ticket. The marketing team wants this to be a simple, fast and upbeat process. Unfortunately, legal and regulatory requirements do not stop at the shoreline. All too frequent are the examples of marketing efforts that ran afoul of regulatory requirements. Here are a few issues to watch out for:
The client made the investment but now wants its money back. It is asking for the full amount invested, even though losses have been incurred. The argument? The adviser or its marketing staff did not have required local registrations.
Marketing staff and the firm have been fined and banned from the industry. This may require disclosure in regulatory filings for years to come. In the U.S., in the most egregious situations, an employee may be banned from having future connections with private offerings of securities under the so-called “bad actor” rules.
Compensation arrangements for marketing staff and others at the firm may have to be changed in major ways and much of the compensation must be deferred. Managers subject to the AIFMD will need to address this issue.
Failing to comply with additional local laws of some jurisdictions may result in substantial penalties and fines.
In short, marketing initiatives cannot be separated from legal and regulatory considerations. To avoid triggering unintended violations of local laws, a firm needs to identify critical issues early-on in the process, so that valuable time and resources will not be wasted in jurisdictions where marketing efforts raise unexpected costs and complexities. Ideally this would occur before the first significant contact. Actions taken early-on (including general communication or stepping off a plane) may impact or limit the ability to rely on regulatory exemptions, such as “reverse solicitation.”
The bottom line should your PM want to fundraise overseas (and who doesn’t consider that at some point?) is this: make the efforts as effective as possible, allowing the firm’s energy to be focused on initiatives with a high chance of success.
Marketing without advance preparation creates a situation that may be low-hanging fruit for the regulators.