New Rules Preclude Sub-Threshold Fund Managers and Semi-Professional Investors from Pre-Marketing

On 1 July 2021, new rules governing pre-marketing activities of managers of alternative investment funds (“Fund Managers”) entered into force in Denmark.

The new legislation incorporates the pre-marketing definition and requirements of the Cross-Border Directive into Danish law. Read more about the definition and requirements set out in the Cross-Border Directive in our article on the subject here.

Previous practice in Denmark

Before 1 July 2021, Fund Managers’ pre-marketing of alternative investment funds in Denmark was not regulated by law. Instead, the Danish FSA had published guidelines stipulating the requirements for legal pre-marketing. According to the Danish FSA (pursuant to the Q&A provided by the Danish FSA) pre-marking was allowed in Denmark if:

• the Fund being pre-marketed was not yet established; and
• no PPM’s, prospectus’ or similar had been prepared by the Fund Manager; and
• the potential investor was not able to commit to acquiring interests in the Fund during such pre-marketing activities.

Such pre-marketing was allowed to be performed by both authorised and registered (sub-threshold) Fund Managers and by non-EEA Fund Managers. Further, such pre-marketing was allowed to test investor interest from both professional investors and semi-professional investors.

The vast majority of Danish Fund Managers manage sub-threshold Funds and have among its investors semi-professional investors benefitting from the special Danish rules permitting marketing to this particular group of non-professional investors. This holds especially true with respect to Danish venture capital Funds but also for other groups of Funds, e.g. certain real estate project Funds. Hence, these Funds have to a very large extent benefitted from the hitherto applicable pre-marketing practice.

The new rules preclude sub-threshold fund managers and semi-professional investors from pre-marketing

The purpose of the Cross-Border Directive is to make it easier for Fund Managers to provide investors with investment opportunities cross-border. However, while the Cross-Border Directive stipulates a broader definition of pre-marketing activities than was provided by the Danish FSA’s previous guidelines, the Danish implementation of the new pre-marketing rules seem to provide a narrower scope for pre-marketing than the existing practice.

While neither the legislative text in both the Cross-Border Directive and the Danish rules implementing the directive expressly prohibit sub-threshold Fund Managers from conducting pre-marketing activities, it is clear from the Danish legislator’s preparatory comments to the new rules that the intention is that pre-marketing may now only be conducted by Fund Managers holding an AIFMD authorisation issued by the competent authority of Denmark or another EEA Member State and may only be aimed at professional investors.

While activities are by default permitted unless prohibited by law, and for the same reason, one may wonder why the Danish legislators did not include these prohibitions directly into the legislative text, the Danish FSA will likely rely on the preparatory comments to the effect that:

1. sub-threshold Fund Managers are no longer able to perform pre-marketing activities, unless they hold a EuVECA registration; and
2. authorised Fund Managers are no longer able to gauge semi-professional investors’ interest as part of their pre-marketing activities.

Why precluding sub-threshold Fund Managers’ pre-marketing?

Sub-threshold Fund Managers have a clear need for testing investor interest just as large, authorised Fund Managers.

As a consequence of the new rules, sub-threshold Fund Managers must set up the entire fund structure and obtain necessary registrations with the Danish FSA before knowing whether there is investor interest, unless such Fund Managers hold a EuVECA passport. Even if such Fund Managers hold a EuVECA passport, such Fund Managers may see the notification and documentation requirements related to pre-marketing activities more cumbersome than establishing and registering the new Fund with the Danish FSA.

Further, and especially for first time Fund Managers, since they will no longer be able to rely on the pre-marketing rules, these may have their fundraising delayed until the fund structure and the registration with the Danish FSA is in place.

Thus, it is difficult to see the logic behind precluding sub-threshold Fund Managers from pre-marketing.

Why precluding pre-marketing approach towards semi-profession investors – and what about EuVECA Funds?

Semi-professional investors constitute a large investor segment in Denmark. For the same reason, Denmark did in its implementation of the AIFM Directive in 2013 make it possible for Fund Managers to market its Funds towards semi-professional investors. The reasoning was that an investor, who commits at least EUR 100,000 and declares to be familiar with the risks involved, is able to understand the complexity and risk related to his/her investment. Accordingly, such investor may be treated in accordance with to the rules governing professional investors.

In a consultation response to the bill, the Danish Ministry of Industry, Business and Financial Affairs states that the reason for prohibiting pre-marketing towards semi-professional investors is that pre-marketing presents investor ideas that are not yet a finished product and thisplaces special demands on the investor group to which the marketing is addressed. This causes the need for semi-professional’s protection against pre-marketing which speaks directly against the reason given in 2013 for making it possible for Fund Managers to market funds towards semi-professional investors.

Further, a condition for an activity being pre-marketed (both pursuant to previous practice and the new rules) is that the investor is not able to commit to acquiring interests in the Fund. Therefore, it is difficult to see why there should be a higher demand for semi-professional investors’ protection against being presented to an investment idea that they cannot commit to than to a finished product they can commit to.

Finally, the EuVECA Regulation allows EuVECA Fund Managers to market their Funds towards semi-professional investors, and when implementing the new pre-marketing rules into the EuVECA Regulation, EU legislators excluded the reference to “professional investors” in the provisions related to pre-marketing. Therefore, EuVECA Fund Managers are – despite the Danish implementation of the Cross-Border Directive – allowed to pre-market their Funds towards semi-professional investors. This makes it even more peculiar that Danish legislators have decided to exclude semi-professional investors from pre-marketing when implementing the Cross-Border Directive.

Since semi-professional investors constitute a large investor segment for many Danish Fund Managers, the new limitations may – as for sub-threshold Funds, cf. above – entail both administrative and financial costs for the Fund Managers who would have to set up their fund structure before knowing whether there is investor interest.

It seems hardly to be in the interest of the Danish Ministry of Industry, Business and Financial Affairs and the Danish FSA to have to process new fund structure entities and AIFMD registrations for Fund Managers that do not yet know if there is sufficient investor interest.

Mazanti’s view

The fact that sub-threshold Fund Managers, Fund Managers seeking semi-professional investor interest and non-EEA Fund Managers will no longer be permitted to rely on the pre-marketing rules may cause some of these Fund Managers to exclude Denmark from being their domicile or from the list of jurisdictions where they will seek funding. This is not in the interest of semi-professional investors, professional investors that regularly invest in Funds domiciled and managed outside the EEA or companies seeking capital from Danish VC and private equity Funds.