Private placement rules and law in Malta

Malta has transposed the AIFMD through subsidiary legislation issued under the Investment Services Act and Investment Services Rules published by the Malta Financial Services Authority (“MFSA”).

The Investment Services Act (Alternative Investment Fund Manager) (Third Country) Regulations (the “Third Country Regulations”) transpose the third country provisions set out in the AIFMD into Maltese law.

Amongst other matters, the Third Country Regulations provide for various requirements which must be satisfied by fund managers (whether EU or Non EU) marketing EU or Non EU AIFs in Malta without a passport, and the various requirements which must be satisfied when targeting professional and retail investors (as the terms are defined under the AIFMD) in Malta. In addition to the Third Country Regulations, on the 22 September 2014, the MFSA issued a circular together with a set of documents formalising the national private placement regime in Malta. The ‘Guidance notes on the completion of the National Private Placement Notification Forms pursuant to the provisions of the AIFMD’ (“NPPR Guidance Notes”) provide further detail as to the process to be followed prior to marketing under the private placement regime in Malta. This includes the submission of the relevant application forms to the MFSA prior to the commencement of marketing activities in respect of the AIFs. 

Neither the Third Country Regulations nor the NPPR Guidance Notes define “private placement”. The NPPR Guidance Notes simply state that the “national private placement regime allows AIFMs to market AIFs in the instances where these cannot be marketed in terms of the passporting regimes outlined in Articles 31 – 33 of the AIFMD”.

Prior to the entry into force of the AIFMD, private placement rules in Malta did not distinguish between target investors and therefore they applied equally to retail and professional investors. Marketing on a private placement basis was restricted to one-to-one offers, without any active marketing or solicitation being permitted. Post-AIFMD, the Third Country Regulations distinguish between professional and retail investors, with more restrictive conditions imposed on marketing to retail investors, such as the authorisation requirement mentioned below.

For a Non-EU manager to market units or shares of an EU or third-country AIF in Malta, the Non-EU manager must adhere to the conditions for the applicability of the private placement regime as set out in the Third Country Regulations. In particular, the Non-EU manager must adhere to Article 42 of the AIFMD as transposed within the Third Country Regulations. Among the various requirements to be met in this respect, the Non-EU manager must (i) comply with certain reporting, disclosure and transparency requirements relating to annual reports, disclosures to investors (both initially and on an- ongoing basis) and reporting obligations to regulatory authorities, as established under Articles 22, 23 and 24 of the AIFMD (and with Articles 26 to 30 where the AIF falls within the scope of Article 26(1) of the AIFMD), (ii) ensure proper cooperation agreements are in place between the relevant regulatory authorities and (iii) in the case of a third-country AIF, ensure that the third country where the third country AIF is established is not listed as a NCCT by the FATF.

EU managers may market Non-EU AIFs and/or EU Feeder AIFs with a non-EU Master AIF or non-EU Master AIFM under the private placement regime in accordance with Article 36 of AIFMD, as transposed in the Third Country Regulations. In this respect the EU manager must ensure that it complies with all the requirements of the AIFMD with the exception of Article 21 (depositary clause). This notwithstanding, the EU manager must ensure that one or more entities has been appointed to carry out the cash monitoring, safekeeping and oversight functions as set out in Articles 21(7), (8) and (9) of AIFMD in relation to the AIFs – the “depositary-lite requirements” and that the details of such entity or entities are communicated to the MFSA. Furthermore, the EU manager must also ensure that there are appropriate cooperation arrangements between the relevant competent authorities, and in the case of non-EU AIFs, that the jurisdiction where the Non-EU AIF is established is not listed as a NCCT by the FATF.

The marketing by Non-EU managers and by the EU managers mentioned in the preceding two paragraphs is subject to the payment of an application fee of EUR 2,500 for the AIF and EUR 450 per sub-fund of the AIF (if applicable) and to the payment of an annual supervisory fee of EUR 3,000 for the AIF and EUR 500 per sub-fund of the AIF (if applicable).

Prior to marketing the AIF under the private placement regime in Malta, the EU / Non-EU manager must complete and submit to the MFSA the relevant notification form (which should be accompanied with a copy of the latest approved offering document(s)) as set out under the NPPR Guidance Notes, including a confirmation that the AIF complies with the relevant conditions set out in the relevant applicable laws, along with the appropriate fee. A confirmation of receipt will be sent to the manager together with a notification number. The manager must wait until the confirmation letter is received from the MFSA prior to commencing marketing.

The above process will permit marketing to professional clients only.  

Marketing to retail investors is subject to additional requirements as set out in the Third Country Regulations and the MFSA rules. In this respect, an AIF may not be marketed to retail investors on a private placement basis unless (in addition to the relevant private placement notification above) a specific authorisation to market to retail investors is obtained from the MFSA. 

Prior authorisation requires a formal application for authorisation to the MFSA, indicating how the relevant requirements are satisfied and the payment of the relevant application fee. Requirements for authorisation to market AIFs to retail investors are: (a) compliance with relevant private placement requirements; and (b) the units or shares in the AIF must qualify as a ‘non complex’ financial instrument under MiFID. 1 This requirement pre-dates MiFID II's transposition in 2018 pursuant to which any fund which is not a UCITS (other than a Structured UCITS) is automatically deemed to be a complex instrument. Following MIFID II’s transposition and pending the revision of this requirement, counsel recommend that promoters engage with the MFSA an early stage to discuss, on a case-by-case basis, whether the MFSA would be amenable to authorise the particular AIF for marketing to retail investors for example based on the argument that, under MiFID I, the shares / units would have been deemed non-complex instruments.  The extent to which an AIF can be marketed to retail investors is a matter that will need to be discussed with MFSA prior to the submission of the above-mentioned application for authorisation. The application must be accompanied by (i) the prospectus of the AIF; and (ii) declaration by directors of the AIFM confirming that the AIF is not a complex financial instrument and including justifiable reasons why this is so. Additional ongoing obligations will apply to AIFs approved for marketing to retail investors. 

A sale on a reverse solicitation or unsolicited basis occurs where: (i) a prospective investor requests information (including marketing material) and therefore the communication/contact is considered to be initiated by the investor rather than by the Non EU manager; (ii) the AIFM or the AIF does not conduct any marketing communications and/or activities in the state of the prospective investor; and (iii) all material transactions relating to the offer and sale occur outside the state of the prospective investor. This is interpreted by the MFSA as not constituting marketing, provided that no additional activities take place which do constitute marketing. Consequently, reverse solicitation is exempt from the private placement rules and passporting requirements and it does not trigger any AIF registration or licensing issues in Malta. In addition, pursuant to the AIFMD, placements by the following entities are not subject to the (private) placement regimes as set out in the Third Country Regulations and the Investment Services Rules as they fall out of the scope of the AIFMD: 

1. Holding companies;
2. Institutions for occupational retirement provision;
3. Supranational institutions, in the event that such institutions or organisation manage AIFs and in so far as those AIFs act in the public interest;
4. National central banks;
5. National, regional and local governments and bodies or other institutions which manage funds supporting social security and pension systems;
6. Employee participation schemes and employee savings schemes;
7. Securitisation special purpose vehicles;
8. AIFs in so far as their only investors are their AIFM or the AIFM’s parent undertakings, their subsidiaries or other subsidiaries of their parent undertaking and where those investors are not themselves AIFs;
9. Investment undertakings, such as family office vehicles which invest the private wealth of investors without raising external capital; and
10. AIFs managed by an AIFM where the aggregated assets managed do not exceed EUR 100m (leverage included) or EUR 500m (when the portfolio of the AIF consists of AIFs that are unleveraged and that do not have redemption rights exercisable during a period of five years following the date of initial investment in each AIF).

For the sake of completeness:  

1. Additional requirements under other laws may apply in relation to the marketing or placement of shares or units in the above entities; and 
2. the marketing or placement of shares or units in a collective investment scheme in Malta (even if managed by a below threshold EU AIFM as outlined in (j) above (“EU De Minimis AIFM”)) is a regulated activity in Malta. The MFSA has published a notification form for EU De Minimis AIFMs and has indicated that it may accept notifications for private placement of AIFs managed by them, however, this will need to be assessed on a case-by-case basis given the lack of harmonisation of rules in relation to EU De Minimis AIFMs. 

To the extent that a contract is governed by Maltese law, local legislation relating to the validity and effects of contracts and the interpretation thereof would apply. Any sanctions set out in the agreement between the fund and the client would be enforceable to the extent that these are not contrary to law, public policy or morality. The client could also rescind the contract with the fund. There may also be liability in tort for damages caused by negligence, gross negligence, fraud or wilful default. Damages payable would consist of actual loss, loss of earnings (unless excluded by contract) as well as expenses incurred in consequence of the damages caused. 

The following regulatory sanctions may apply. Under the Investment Services Act (“ISA”) the MFSA may, if it is satisfied that a person’s conduct amounts to a breach of any of the provisions of the ISA, impose an administrative penalty not exceeding EUR 150,000 for each infringement or failure to comply. In case of certain other breaches as provided for in Article 22 and 23 of the ISA, a person found guilty shall be liable on conviction to a fine not exceeding EUR 466,000 and/or to a term of imprisonment not exceeding four years. 

The Companies Act (“CA”) and the Prospectus Regulation provide for rules in relation to distribution and registration of prospectuses which should be issued when offering securities to the public. Offers of securities to the public fall outside fund regulation in Malta but are subject to the CA and the Prospectus Regulation. A security is defined as including a share, debenture or any other similar instrument issued by a company or other commercial partnership. Exemptions from the obligation to issue a prospectus for an offering include (i) offerings addressed solely to qualified investors, (ii) offerings addressed to fewer than 150 non qualified investors per EU State and (iii) offerings addressed to investors who acquire securities for at least EUR 100,000 in each separate offer.