Reverse solicitation is a well-known concept in financial services in several jurisdictions around the world. This concept highlights an individual’s right to engage with a financial services provider from a third-party country, even if that provider is not authorized to provide those services in the country where the individual is based (commonly known in the industry as “the reverse solicitation exemption”). Essentially, the reason behind the exemption is to allow individuals to engage, at their own discretion and initiative, with financial service providers, regardless where such providers are based. Nonetheless application of the exemption is conditional and restricted in scope, both in order to protect retail customers and also prevent financial service providers from circumventing the prevailing regulatory requirements.

The newly enacted MiCA (Markets in Crypto-Assets Regulation), which entered into force in June 2023, and is set to be fully implemented by December 30, 2024, marks a significant milestone in the governance of digital assets across the EU member states, aimed at fostering innovation and encouraging fair competition, while protecting retail holders and ensuring market integrity.
According to MiCA (Article 61(1)), reverse solicitation occurs when a client, established or situated within the EU, independently and exclusively initiates contact with a service provider from a third country requesting crypto-asset services or activities. In other words, the reverse solicitation exemption applies exclusively to entities located outside the EU.

It should be mentioned in this context, that the reverse solicitation exemption is not a new regulatory concept under EU law. In fact, a similar exemption is also present in Markets in Financial Instruments Directive II (“MiFID II”), which was legislated by the EU back in 2018 primarily in order to standardize financial practices across the EU while enhancing protection for investors.

Nevertheless, the ambiguity surrounding the reverse solicitation exemption and the difficulty in its application has been a persistently challenging issue. Over the years, numerous attempts were made to clarify and define the term “solicitation” more precisely, so as to prevent misinterpretation and exploitation of the exemption.

In order to address these concerns, the European Securities and Markets Authority (“ESMA”), as the authority responsible for the implementation and oversight of MiCA, issued a draft consultation paper on 29 January 2024, seeking input on proposed guidelines with regard to the conditions of application of the reverse solicitation exemption under MiCA and the supervision practices that national competent authorities may take to prevent its circumvention (the final report is expected to be published by the end of 2024). Similarly to its interpretation of the exemption under MiFID II, ESMA emphasized that the exemption under MiCA should be narrowly interpreted to prevent its misuse and exploitation as a loophole for circumventing MiCA requirements.

Essentially, the interpretation of “solicitation” under MiCA is broad and encompasses any promotion, advertisement, or offer of crypto-asset services to clients established or situated in the EU using any means. This includes, inter alia, through online advertising, brochures, telephone calls, face-to-face meetings, press releases, social media platforms, and mobile applications.  It may also include the participation in road shows and trade fairs, invitations to events, affiliation campaigns, ad retargeting, invitations to fill in a response form or follow-up on a training course and messaging platforms as well as promotions, advertisements and general offers directed to the public (with a broad and large reach) such as, for instance, brand advertising by way of sponsorship deals. Furthermore, third-country firms relying on the exemption are prohibited from offering additional crypto-assets or services to the client, except within the context of the original transaction for which the solicitation was initially sought.

In the consultation paper, ESMA clarifies that solicitation under MiCA can be conducted by the third-country firm itself or by any entity or person acting explicitly or implicitly on behalf of the third country. Notably, even solicitation carried out by an EU-regulated person or entity on behalf of a third-country firm would still constitute a breach of MiCA. Further, ESMA emphasizes that the client’s exclusive initiative must be clear and based on factual evidence; disclaimers or contractual arrangements alone, cannot override contrary facts.

Given the broad interpretation of “solicitation” and the stringent requirements for demonstrating the client’s initiative, it is evident that relying on the reverse solicitation exemption under MiCA will be quite challenging for third-country firms to prove. Any “reach out” to a potential client, directly or indirectly, could be perceived as solicitation. Consequently, reliance on this exemption should be acted upon with extreme caution.

Nonetheless, there are measures that can be taken when relying on the reverse solicitation exemption. Key points to consider in this regard include the following:

• The client’s exclusive initiative must be clear and fact-based; disclaimers or contractual arrangements cannot override contrary facts. Third-country firms should be able to provide records tracking the relationship with the client and, in particular, whether the client had indeed taken the initiative to receive crypto asset services for a new product.
• In order to assess whether third-country firms solicit clients established or situated in the EU, all the surrounding facts and circumstances of the case will be deemed relevant. For instance, a website in an official language of any member state (other than English) should be a strong indication that a third-country firm is soliciting clients established or located in the EU. Conversely, geo-blocking by a third-country firm aimed at prohibiting access to a website by clients established or situated in the EU would be a strong indication that the third-country firm is not soliciting clients in the EU via its website.
• Except if offered within the context of the original transaction, the third-country firm relying on the exemption will not be allowed to subsequently offer the client additional crypto-assets or services, even if such crypto-asset or service is of the same type as the one originally requested.

This cautious approach is essential for navigating the EU regulatory landscape and avoiding potential penalties for non-compliance.

Published at Lexology