Reed Smith In-depth

Key takeaways

  • A reverse solicitation exemption removes the need for a third-country firm to be licensed to provide services in a jurisdiction where those services have been solicited at the exclusive initiative of the client, and is commonly found in financial services law, including that made at EU level.
  • The EU authorities are keen to ensure that the exemption is available only in a very narrow set of circumstances, and the draft guidelines are an attempt by ESMA to set out those circumstances clearly to prevent abuse.
  • Under the draft guidelines, solicitation is to be given a wide meaning, capturing any type of marketing or offer to an EU based person through any medium and by any person.
  • Furthermore, the reverse solicitation exemption is intended to apply for a limited period and only in respect of the particular type of product or service requested by the client at its own initiative.
  • It is clear that ESMA expects EU member state regulators to be diligent in monitoring the use of the exemption to prevent third-country firms inappropriately taking advantage of the exemption.
  • If the draft guidelines are adopted in their current form, the reverse solicitation exemption is unlikely to be of much practical assistance to firms seeking to access EU clients given the very limited circumstances in which it will apply.

On 29 January 2024, the European Securities and Markets Authority (ESMA) published a consultation paper on the draft guidelines on reverse solicitation under the Markets in Crypto Assets Regulation (MiCA) (the Consultation Paper). ESMA invites stakeholder feedback by 29 April 2024.

What is reverse solicitation?

Broadly, a firm that intends to conduct investment activities or provide investment services in a jurisdiction needs a licence to do so, unless it benefits from an exemption. This applies even to firms that are not situated within that jurisdiction but want to provide investment activities or services on a cross-border basis. Regulators are typically keen to regulate such in-bound activities as otherwise an uneven playing field would be created – firms situated within the jurisdiction would be subjected to requirements that those outside the jurisdiction would not. However, the reverse solicitation exemption permits a narrow exemption. The basic idea is that the regulators of a jurisdiction can permit an overseas firm to conduct investment activities with, and provide investment services to, clients in that jurisdiction without needing a licence there if such firm has not solicited or marketed those activities or services.

Reverse solicitation exemptions are quite common in financial services legislation but can be very different in their breadth and usefulness. In EU financial services legislation, the most well-known reverse solicitation exemption is article 42 of Directive 2015/65/EU (MiFID II), which requires member states to ensure that where a retail or professional client established or situated in the EU “initiates at its own exclusive initiative” the provision of an investment service or activity, that firm does not need to be authorised as a result.