Changes To Marketing Alternative Investment Funds In The EU – Finance and Banking



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The EU has adopted a package of measures which will implement
some important changes to the way in which alternative investment
fund managers (“AIFMs“) market their
funds cross-border in the EEA. One of the principal aims of the
changes is to remove barriers to cross-border marketing of
alternative investment funds (“AIFs“)
which have arisen in large part due to differing implementation of
the Alternative Investment Fund Managers Directive
(“AIFMD“) across member states of the
EEA since 2014.

The new definition of and conditions for
“pre-marketing” will establish a defined phase of
“pre-marketing” as distinct from “marketing”
under the AIFMD. Importantly, once an EEA AIFM has engaged in
“pre-marketing” activity in a jurisdiction any investment
from an investor in that jurisdiction within 18-months of such
pre-marketing will be deemed to be the result of marketing
activity. Consequently, the ability to rely upon reverse
solicitation will be curtailed within the EEA. The impact for
non-EEA AIFMs is not yet clear since the CBD/R (as defined below)
address only EEA AIFMs. However, it is highly unlikely that
jurisdictions in the EEA will want to retain different
pre-marketing regimes for EEA versus non-EEA AIFMs. This is
something that non-EEA AIFMs looking to raise capital within the
EEA in 2021 and beyond should keep under review.

The package of reforms is comprised of Directive (EU) 2019/1160
regarding the cross-border distribution of collective investment
undertakings (“CBD“) and Regulation (EU)
2019/1156 on facilitating cross-border distribution of collective
investment undertakings (“CBR“)
(together “CBD/R“) and will come into
force within the EEA on 2 August 2021.

The CBD/R apply to EEA AIFMs. However, it should be noted that
Member States do not have a completely free hand in relation to
their national private placement regimes
(“NPPR“). It is highly likely that at
least some of the changes will also impact how non-EEA AIFMs are
able to market their funds into the EEA under the applicable NPPR.
The full impact for non-EEA AIFMs will only be seen over time.
However, non-EEA AIFMs should have the CBD/R on their radar and
monitor changes to how they market their funds into the EEA as the
implementation date approaches.

It should be noted that the CBD/R applies to the distribution of
funds under both the AIFMD and the UCITS Directive. However, this
briefing note focusses exclusively on the changes relevant to
AIFMs.


Principal
changes:

  • Harmonised definition and conditions
    of “pre-marketing”

  • Notification requirement to the
    national competent authority (“NCA“) of
    the AIFM when “pre-marketing” has commenced

  • Any subscription within 18-months of
    “pre-marketing” will be deemed to be the result of
    marketing

  • Any third party marketing an AIF on
    behalf of an AIFM must be authorised as a MiFID investment firm,
    credit institution, AIFM or UCITS management company

  • Restrictions on marketing of a
    successor fund following de-notification of marketing

Harmonised “pre-marketing” regime for EEA AIFMs

Since 2014, due to differences in the implementation of the
AIFMD as regards when “marketing” commences for the
purposes of the AIFMD, frustrations have been voiced regarding the
inconsistent ability to pre-market across Europe in order to test
the investor appetite for an investment strategy in the EEA. This
arises because in some jurisdictions “marketing” is
considered to occur at an early stage in the investment process,
whereas in other jurisdictions (e.g. Luxembourg (and the UK))
“marketing” is considered to occur at a much later stage
when the offer of interests in an AIF is capable of being accepted
by investors on the basis of final form subscription documents.

The CBD/R introduces an EEA-wide definition of
“pre-marketing”, i.e. those promotional activities which
can take place before the marketing passport (which only applies
once “marketing” has commenced) is available. The
definition of “pre-marketing” is broad:

“provision of information or communication, direct or
indirect, on investment strategies or investment ideas by an EU
AIFM or on its behalf, to potential professional investors
domiciled or with a registered office in the Union in order to test
their interest in an AIF or a compartment which is not yet
established, or which is established, but not yet notified for
marketing in accordance with Article 31 or 32, in that Member State
where the potential investors are domiciled or have their
registered office, and which in each case does not amount to an
offer or placement to the potential investor to invest in the units
or shares of that AIF or compartment”.


Key features of
“pre-marketing”:

  • Provision of information or
    communication on investment strategies or ideas (whether direct or
    indirect)

  • By an EEA AIFM or on its behalf (e.g.
    placement agent or non-EEA sponsor)

  • To potential professional investors
    in the EEA

  • In order to test their interest:

  • In an AIF/compartment which is not
    yet established; or

  • In an AIF/compartment which is
    established, but not yet notified for marketing under AIFMD in that
    Member State

  • In each case does not amount to an
    offer or placement to the potential investor to invest in the units
    or shares of that AIF/compartment

Conditions for “pre-marketing”

The definition of “pre-marketing” is augmented by the
new conditions for pre-marketing. An EEA AIFM may engage in
“pre-marketing”, except where the information provided to
investors:

  • Is sufficient to allow investors to
    commit to acquiring interests in the AIF;

  • Amounts to subscription forms (or
    similar documents) whether in draft or final form;

  • Amounts to constitutional documents,
    a prospectus or offering documents of an AIF which has not yet been
    established, in final form.

In addition, any draft offering documents must not contain
sufficient information to allow investors to take an investment
decision and must include a statement that: (i) the document does
not constitute an offer or an invitation to subscribe for interests
in the AIF; and (ii) the information presented should not be relied
upon because it is incomplete or subject to change. It is clear
that simply labelling a document as draft but otherwise being in
final form will not be acceptable. In addition, the circulation of
subscription forms is prohibited and they must not be provided even
in draft form during a “pre-marketing” exercise.

Notification of pre-marketing

It will be a requirement for EEA AIFMs to notify their NCA
within two weeks of commencing “pre-marketing”. The
notification will need to specify where and for which periods the
pre-marketing is taking or has taken place with a brief description
of the pre-marketing.

This notification of pre-marketing is distinct from the AIFMD
marketing process and it will not be possible for an EEA AIFM to
accept a subscription before the AIFMD marketing process has been
completed. Importantly, any subscription made within 18-months of
pre-marketing activity will be considered to be the result of
marketing activity, triggering the AIFMD marketing process.
Consequently, commencing pre-marketing will effectively preclude
reliance by the AIFM on reverse solicitation for a period of
18-months.

Placement agents and other distributors

Significantly, any third party carrying out pre-marketing on
behalf of an AIFM must be authorised in the EEA as an investment
firm (or a tied agent of an investment firm), credit institution,
UCITS management company or AIFM. This is an important change,
particularly in light of Brexit. Placement agents and other
distributors will need to consider whether they have the
appropriate regulatory authorisations and seek to move EEA
distribution into an appropriately authorised entity in advance of
2 August 2021.

Discontinuing marketing

There has been considerable uncertainty and diverge of practices
across the EEA in relation to when an AIFM marketing under the
AIFMD marketing passport can discontinue marketing. The CBD/R
introduces a new formalised procedure for this. An AIFM will be
able to discontinue marketing where certain conditions are
fulfilled and a notification is made to the relevant NCA.

The conditions are:

  • Except in the case of closed-ended
    AIFs, making a blanket offer to repurchase or redeem interests held
    by investors in that Member State;

  • Publicising the intention to
    terminate marketing arrangements;

  • Terminating or modifying contracts
    with intermediaries/distributors to ensure they do not continue to
    market the AIF.

There is effectively a restriction on pre-marketing of successor
AIFs once an AIF has been de-notified from marketing. The AIFM
cannot engage in pre-marketing that AIF (or a successor AIF with
similar investment strategy/idea) in that Member State for 36
months from the date of de-notification. Clearly this will cause
difficulties, particularly for closed-ended funds. It is likely
that AIFMs will simply choose not to de-register for marketing in
order to not impact when the successor fund can be taken to
market.

Impact on non-EEA sponsors

The CBD/R impacts EEA AIFMs directly. However, the changes will
impact non-EEA managers in a range of ways:

  • EU Member States do not have a
    completely free hand as regards non-EEA AIFMs marketing in their
    jurisdiction under Article 42 of the AIFMD and their NPPRs. The CBD
    contains a recital that states that national rules cannot in any
    way disadvantage EEA AIFMs vis-à-vis non-EEA AIFMs. It is
    therefore highly likely that we will see a levelling-up of the
    NPPRs across the EEA with the requirements of the CBD/R on
    pre-marketing and discontinuation of marketing.

  • Non-EEA managers using an EEA host
    AIFM in order to avail themselves of the EEA marketing passport for
    a parallel vehicle will find the marketing of the fund subject to
    the new requirements. In particular, the requirement that any
    person marketing the fund on behalf of the EEA AIFM (i.e. the
    sponsor) must be authorised under the relevant sectoral legislation
    in the EU.

Application in the UK

The Financial Services (Implementation of Legislation) Bill
2017-19 provided a mechanism to implement EU financial services
legislation that: (1) had been adopted by the EU, but did not yet
apply; and (2) EU proposals that were in negotiation and that may
have been adopted up to two years post-Brexit. The CBD/R were
listed in the Schedule to the Bill. However, the Bill was not
passed by the end of the 2017-19 parliamentary session and made no
further progress. It is, therefore, currently uncertain how the
CBD/R will be implemented in the UK post-Brexit.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.



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