Pre-marketing and reverse solicitation of private equity and other alternative investment funds in Europe

An update on the AIFMD amending directive

The European Commission originally announced a proposal for a supplementary AIFM Directive in March 2018. The terms of the proposed amending directive have now been finalised and are currently expected to be approved in early summer 2019.

Background

Back in March 2018, the European Commission announced a proposal for a supplementary AIFMD Directive providing for a uniform regime for "pre-marketing" of collective investment funds across Europe (the "Amending Directive"). See our blog post "Proposed changes to the marketing of private equity funds in Europe – good news or bad news?".

The final news is now in - is it good news or bad news?

Political agreement of the Amending Directive has now been concluded, subject to final legislative approval. What has changed and where does it leave us?

Pre-marketing – position prior to the Amending Directive

As reported in our previous blog post, the AIFM Directive regulates "marketing" to investors, but not "pre-marketing". The problem is that an activity that in one member state would be regarded as merely pre-marketing (and which therefore would not trigger the AIFMD rules) can be treated as marketing activity in another member state (and which therefore does trigger the AIFMD rules). So, the stage at which you have to notify a local regulator, or register your fund with a local regulator, can vary dramatically from jurisdiction to jurisdiction. The Amending Directive seeks to help address this problem.

Pre-marketing: Amending Directive – Original Position vs Revised Position

The table below summarises how certain key aspects of the original definition of pre-marketing (and the conditions to qualifying as pre-marketing information) in the previous draft of the Amending Directive have ended up in the revised wording:

Original Position

Revised Position

Restricted to information in relation to an AIF which was not yet established.

Now extended to include an AIF which is established, but not yet notified for "marketing" (as defined by AIFMD).

Excludes documentation enabling investors to commit to investing in a particular AIF.

No change.

Excludes information which amounts to a prospectus, offering documents or constitutional documents, whether in draft or final form.

Such information in draft form, but not in final form, can now constitute "pre-marketing" - a vital improvement, allowing pre-marketing on the basis of a draft PPM/LPA - provided it carries specified health warnings making it clear that it is not an offer or invitation to subscribe and cannot be relied upon.

Pre-marketing notification

The AIFM must notify its home member state regulator of the pre-marketing within two weeks of its commencement. This is more bureaucracy than currently required in those member states with a liberal interpretation of marketing, but should avoid having to make pre-marketing notifications in multiple EU member states following the full implementation of the Amending Directive.

Reverse solicitation

The final version of the Amending Directive retains the provision from the previous draft to the effect that any subscription by an investor in relation to an AIF which has been the subject of pre-marketing is considered to be as a result of "marketing" and notification shall be required accordingly. This provision has, however, been amended in the final version of the Amending Directive so that the "deemed marketing" rule now only applies when the subscription takes place within 18 months of the AIFM beginning pre-marketing.

The key issue here is that it is unclear whether the restriction applies to each investor or to each country. One reading of it would imply that any pre-marketing in one country would put all investors in that country offside for 18 months as regards the possibility of reverse solicitation, even if as a factual matter another investor genuinely approached a manager entirely on its own initiative. This led some to speculate, in effect, the near-death of reverse solicitation in the EU for alternative investment funds.

Non-EU AIFMs

The Amending Directive applies to pre-marketing by EU AIFMs, not non-EU AIFMs. The approach to pre-marketing by Non-EU AIFMs therefore remains within the discretion of member states. However, the recitals to the Amending Directive state that complying with the Amending Directive should not disadvantage EU AIFMs over non-EU AIFMs, which would suggest that regulators will probably apply the same definition of pre-marketing to non-EU AIFMs as well. It is unclear how the overall procedure would work for a non-EU AIFM as the procedure in the Amending Directive presupposes that the AIFM is regulated in the EU and that its home regulator will take care of the process of notifying the other EU regulators in the countries where pre-marketing will be undertaken.

We have prepared a separate, more detailed newsflash that looks in more detail at the position from the point of view of a non-EU manager selling non-EU funds into Europe.

Implementation

The Amending Directive is expected to progress to the European Council in April and the European Parliament for adoption thereafter and will then be required to be transposed into national law within two years. So, full implementation would currently be expected sometime in the summer of 2021.

Brexit

Assuming that the UK has left the EU before the date for implementation of the Amending Directive into national law in 2021, then query whether the UK will adopt equivalent provisions? Currently, the answer to this question is bound up with the ongoing political debate in the UK around whether a close relationship with the EU is desirable or not.

If you have any questions in relation to the above please contact the authors.

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