Private placement rules and law in Estonia

Estonia has fully implemented AIFMD with a new Investment Funds Act (“IFA”) taking effect on 10 January 2017.

There is no express definition of “private placement” in Estonian law. Instead, IFA provides for a list of exemptions under which a fund offer is not deemed to be a public. For the purpose of IFA,  an offer of units or shares of a fund (fund offer) is deemed to be the information provided to persons in any form, any manner and by any means about the opportunities to acquire or subscribe for fund units or shares which is precise enough with regard to the terms and conditions of the offer as well as the units or shares offered in order to allow the person to decide on the acquisition of or subscription for these shares or units.

Article 10(4) of the IFA states that a fund offer is not deemed to be a public offer if meets at least one of the following exemptions: 

1. the offer complies with the provisions of Articles 1 (4)(a)-(d) of the Regulation (EU) 2017/1129 of the European Parliament and of the Council (EL) on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Directive 2003/71/EC (the “Prospectus Regulation”);
2. the offer is submitted upon management of a securities portfolio or guaranteeing of an offer or issue of securities for the purposes of securities portfolio management or § 44 clause 6 of the Estonian Securities Market Act (i.e. services related to the guarantee of the offer or issue of securities)) to a fund manager, investment firm or credit institution;
3. an offer of securities with a total consideration of less than 2,500,000 euros per all the contracting states in total calculated in a one-year period of the offer of the securities.  

An AIF can be marketed in EEA Member States to professional investors and an AIFM must ensure the documentation of pre-marketing. In the course of pre-marketing it is prohibited to submit to professional investors: 1) information and documents which are so detailed that decisions on the acquisition of units or shares can be made on the basis of them; 2) documents or drafts which allow the subscription of units or shares and 3) the articles of association, partnership agreement, fund rules or prospectus of the fund, which has not yet been established or founded, in the final form thereof. If any such drafts or documents are submitted then it must be clearly indicated that it does not constitute as an offer or an invitation to subscribe for the units or shares and that the provided information is not conclusive. 

An AIFM must ensure that a professional investor does not acquire the units or shares in the course of pre-marketing. If within 18 months of the pre-marketing of an AIF a professional investor subscribes for the units or shares that are referred to in the information provided in the pre-marketing then the procedure for notifying of the commencement of the offer of an AIF provided for in the IFA will be applied.

An AIFM must submit to the EFSA a notice of pre-marketing in a form reproducible in writing within two weeks after the commencement of pre-marketing. The notice must include: 1) the period of pre-marketing; 2) an overview of the investment strategy and 3) a list of pre-marketed AIFs or their sub-funds.

A fund of another EEA member state may also be pre-marketed in Estonia provided that the pre-marketing complies with the requirements in IFA and that the AIFM informs the EFSA via its home State competent authority within two weeks as of the commencement of pre-marketing. The EFSA may request additional information from the home State authority.

Estonian public offer rules may not apply if the placement of securities of an investment fund is made at the initiative of an investor, i.e. on the basis of reverse solicitation (including unsolicited request). In addition, Estonian public offer rules would not apply if the offer is not deemed to be made in Estonia. This condition may only be deemed fulfilled if no marketing materials or other communications regarding the offer of securities are distributed in Estonia or addressed to Estonian investors (i.e. marketing materials are not in Estonian, there is no Estonian help desk/ call centre, a website is not on an Estonian server etc.), any contracts are concluded and the securities are acquired, cleared and accepted by Estonian persons outside Estonia, according to a non-binding opinion expressed by the Estonian Financial Supervision Authority (“EFSA”). Thus, reverse solicitation could, in principle, fall outside the Estonian public offer rules to the extent that the foreign fund is not actively marketed in Estonia and the acquisition of fund units or shares occurs and is cleared outside Estonia.

The EFSA will, however, assess on a case-by-case basis whether the above-mentioned conditions are fulfilled.

The IFA regulates all types of investment funds (investment funds are defined as a legal entity or pool of assets which involves the capital of a number of investors with the view of investing it in accordance with a defined investment policy for the benefit of the investors in question and in their common interests). Pursuant to IFA, a fund can be established as a common fund or founded as a public limited company, a limited partnership or a defined-benefit occupational pension fund. With amendments to the IFA that have transposed the AIFMD, the list of available types of investment funds has been supplemented to include AIFs (although AIFs are not defined in the IFA as a separate fund class, but rather the legislation applicable to AIFs has been transposed through the rules and regulations concerning AIFMs) by reference to funds that are defined as another (not previously regulated) pool of assets or person established for collective investment, including an investment fund founded in a foreign state. The general exemptions of AIFMs stipulated in Paragraph 3 of Article 2 of the AIFMD have also been implemented in Estonia.

An offer of securities in a manner not compliant with Estonian law may lead to:

1. claims for damages by investors that have subscribed to the offer of securities; and
2. regulatory sanctions (including the imposition of administrative penalties of up to EUR 400,000 and also ban on further distribution activities of the fund); and
3. criminal liability (including a fine of up to EUR 16m and/ or the risk of imprisonment for the directors of the fund manager or marketing entity).

The private placement regime described above applies according to the SMA to the following types of securities (non-fund investments):

1. a share or other similar tradeable right;
2. a bond, convertible security or other tradeable debt obligation issued which is not a money market instrument;
3. a subscription right or other tradeable right granting the right to acquire securities specified in the previous two points;
4. a money market instrument;
5. a derivative security or a derivative contract; 
6. a tradeable depositary receipt; or
7. a greenhouse gas emission allowance within the meaning of subsection 137 (1) of the Estonian Atmospheric Air Protection Act.

The offer of the above non-fund investments is exempt from the obligation to publish a prospectus if it falls under any of the exemptions stipulated in Article 1 (4) of Prospectus Regulation.