Pre-marketing of AIFs and EuVECA Funds
Published 23 August 2019
Following the recent amendments to the AIFM Directive (“AIFMD”) and the EuVECA Regulation, this article discusses the new rules on pre-marketing covering both AIF and EuVECA Funds (for more details on the amendments please read here).
Until now, it has been up to each member state to interpret whether an activity performed by an AIF Manager (“AIFM”) was covered by the marketing definition set out in the AIFMD. Consequently, such early cross-border activities have been a minefield as certain activities might be considered pre-marketing in some member states while other member states would consider this as marketing pursuant to the AIFMD.
The amended AIFMD provides a definition of pre-marketing for the purpose of harmonizing the concept of pre-marketing and under which conditions pre-marketing may be performed.
Pre-marketing of AIFs is now defined as:
“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”’.
The pre-marketing rules only apply to authorised EU domiciled AIFMs marketing EU AIFs towards potential professional investors, who are domiciled in EU as well. The member states shall allow such pre-marketing, subject to certain restrictions. An authorised AIFM may not engage in pre-marketing if the information presented to potential professional investors:
- is sufficient to allow investors to commit to acquiring units or shares of a particular AIF, or
- amounts to subscription forms or similar documents whether in a draft or a final form, or
- amounts to constitutional documents, a prospectus or offering documents of a not-yet-established AIF in a final form.
Where a draft prospectus or offering documents are provided, the documents shall not contain information sufficient to allow the investors to take an investment decision and shall clearly state:
- that such documents do not constitute an offer or an invitation to subscribe to units or shares of an AIF, and
- that the information presented therein should not be relied upon because it is incomplete and may be subject to change.
AIFMs shall ensure that no investors acquire units or shares in an AIF through pre-marketing and that the investors who were contacted as part of the pre-marketing only acquire units or shares in the AIF through marketing permitted under the AIFMD. The Danish FSA has previously stated in a Q&A that preliminary meetings with potential investors prior to the establishment of an AIF – and before a PPM, prospectus or the like is prepared – are not considered to be marketing by the Danish FSA, provided that the investors are not allowed to make any commitments to acquire shares in the fund, e.g. by a “Letter of Intent” or similar documents. The Danish FSA does not clearly state whether this covers draft offering documents as well. Furthermore, it is not clear whether the ban of distributing PPM, prospectus or the like covers both established and not-yet-established funds.
Consequently, the new pre-marketing definition provides a broader opportunity for pre-marketing than hitherto permitted by the Danish FSA. By the amended AIFMD, pre-marketing will be allowed even if the AIF is already established but not yet notified for marketing. Also, draft offering documents concerning not yet established AIFs may now be provided as well as long as the stipulated requirements are met.
If any investor, within 18 months of the AIFM having begun pre-marketing, subscribes to units or shares in (a) an AIF referred to in information provided in the context of pre-marketing or (b) an AIF established as a result of the pre-marketing, such subscription is considered to be the result of marketing and shall be subject to the applicable notification procedures set out in the AIFMD. Based on the wording of the amended AIFMD, we assume that this applies to all investors, including investors who were not approached during the pre-marketing activities. This means that pre-marketing activities will require the AIF to be notified for marketing before any investor can subscribe to units or shares in the AIF – even if such subscribing investor was not approached during the pre-marketing of the AIF.
Notification and documentation of pre-marketing activities
AIFMs are not required to notify the competent authorities of the content or of the addressees of pre-marketing, before it engages in pre-marketing. However, AIFMs shall, within two weeks of it having begun pre-marketing, inform the competent authorities of its home member state of:
- the member states in which the pre-marketing is taking or has taken place,
- during which periods the pre-marketing is taking or has taken place,
- a brief description of the pre-marketing, including information on (i) the investment strategies presented and, where relevant, (ii) a list of the AIFs and compartments of AIFs which are or were subject of pre-marketing.
An AIFM shall ensure that its pre-marketing activities are adequately documented. The amended AIFMD does not state for how long this documentation should be stored and, consequently, it is our assumption that this should be stored during the life time of the fund.
Pre-marketing by a third party
A third party may only engage in pre-marketing on behalf of an authorised AIFM if it itself is either (a) an authorised AIFM, (b) an authorised investment firm under MIFID II, (c) a credit institution, (d) a UCIT management company, or (e) a tied agent under MIFID II.
Pre-marketing by non-EU AIFMs
For now, the provisions will only apply to EU AIFMs with EU AIFs. However, we expect that the provisions will be transposed into national private placement rules at some point and, as such, also have an impact on third country fund managers, especially since national regulators are being urged to make sure that there is a level playing field for EU and non-EU managers. At this point, Denmark has not established any private placement rules and we await to see how the implementation of the amendment directive will change that.
The definition and conditions for pre-marketing of EuVECA Funds are set out in the New Regulation amending the EuVECA Regulation and are equivalent to the conditions set out above.
Pre-marketing activities by non-authorised AIFMs
The provisions set out in the amended AIFMD governs authorised AIFMs. Pre-marketing activities performed by non-authorised AIFMs are not comprised by the amended AIFMD. It is yet to be seen whether the outcome of the national implementation of the amended AIFMD will cover non-authorised AIFMs as well.
Since the Danish FSA already allows some pre-marketing activities for both authorised and non-authorised AIFMs, and since the amended AIFMD provides a clearer pre-marketing definition and process, it is likely that the provisions will be transposed into national private placement rules to cover non-authorised AIFMs as well in order to ensure a harmonisation of pre-marketing activities. In that case, it will be interesting to see whether the obligations to inform and document the pre-marketing activities will be imposed on non-authorised AIFMs as well, or if only the definition of pre-marketing and the rules on reversed solicitation will be applicable.
While the Danish implementation of the AIFMD does not provide for a comprehensive regulation of non-authorised AIFMs, the regulation does provide rules on how non-authorised AIFMs may market their sub-threshold AIFs. Consequently, it is likely that the provisions will become transposed into Danish national private placement rules in full to cover non-authorised AIFMs as well.
In Denmark, most EuVECA funds are managed by non-authorised AIFMs, and such AIFMs will either way be covered by the pre-marketing rules pursuant to the New Regulation.
While the outcome of the changes to the AIFMD will depend on the national implementation hereof, we expect the definition of pre-marketing to increase legal certainty and enable AIFMs to apply for the AIFMD or EuVECA passport later in the process.
The amended AIFMD came into force on 1 August 2019 and shall then be transposed into national law by 2 August 2021.
The amended EuVECA regulation came into force on 1 August 2019 and the new EuVECA amendments shall apply from 2 August 2021 (and, thus follows the time line for implementation of the AIFMD amendments).