Private placement rules and law in the United Kingdom

1. Summary of private placement provisions for fund interests (if applicable)

The UK private placement regime is set out at Chapter 3, Part 6 of the Alternative Investment Fund Managers Regulations 2013 (the “AIFM Regulations”), and in Rules and Guidance in the Financial Conduct Authority (“FCA”) Handbook. There is no definition of private placement. However, FCA guidance states:

An offering or placement takes place for the purposes of the AIFMD UK regulation when a person seeks to raise capital by making a unit or share of an AIF available for purchase by a potential investor. This includes situations which constitute a contractual offer that can be accepted by a potential investor in order to make the investment and form a binding contract, and situations which constitute an invitation to the investor to make an offer to subscribe for the investment.”

“… a ‘placement’ includes situations where the units or shares of an AIF are only made available to a more limited group of potential investors.

A non-UK AIFM is required to notify the FCA of its intention to market under the UK private placement regime, providing certain information about each AIF concerned, and confirming that it meets the relevant conditions in the AIFM Regulations and/or the FCA. The AIFM is entitled to market the AIF as soon as a notification containing all of the required information has been sent to the FCA.

However, the FCA will send out an automated response confirming that the original notification has been successfully processed and so firms may wish to wait until this confirmation is received before starting to market.

A fee must be paid to the FCA in order to market under the private placement regime. The fee for an AIF managed by a full-scope Non-UK AIFM is GBP 250. For an AIF managed by a sub-threshold Non-UK AIFM, it is GBP 125.

Conditions for Non-UK AIFMs (Regulation 59)

A Non-UK AIFM notifying the FCA of its intention to market any AIF (whether UK, EEA or Non-EEA) in the UK under the local private placement regime must confirm the following conditions are satisfied:

  1. The AIFM is the person responsible for complying with the implementing provisions relating to the marketing of the AIF;
  2. the AIFM complies with certain rules in the FCA Handbook regarding prior disclosure of information to investors, the provision of annual reports to investors and the reporting of certain information to the FCA including the main instruments in which it is trading; the principal markets of which it is a member or where it actively trades; and the principal exposures and most important concentrations of the AIF;
  3. If it manages AIFs which acquire majority control of non-listed companies and issuers (with certain exceptions), it complies with the additional disclosure requirements and asset stripping restrictions under Part 5 of the AIFM Regulations;
  4. Appropriate co-operation arrangements are in place between the FCA and the supervisory authorities of the country where the third country AIFM is established and, if applicable, of the third country where the AIF is established  in order to ensure an efficient exchange of information that enables the FCA to carry out its duties; and
  5. The country where the third country AIFM and, if applicable, the third country AIF is established must not be listed as a NCCT by the FATF.

Conditions for “small” Non-EEA AIFMs (Regulation 58)

A small Non-UK AIFM notifying the FCA of its intention to market any AIF (whether UK, EEA or Non-EEA) in the UK under the local private placement regime, must confirm that the AIFM is the person responsible for complying with the implementing provisions relating to the marketing of the AIF; and that the AIFM is a small third country AIFM. The AIFM must also provide the FCA with certain information on the main instruments in which the AIFM trades and the principal exposures and most important concentrations of the AIFs that it manages.

The relevant forms to notify the FCA are available on the FCA website.

In theory, both professional and retail investors in the UK are within the scope of the private placement provisions, although additional UK financial promotion rules prevent the marketing of funds to ordinary retail investors unless they have been approved by the FCA.

The UK does not have a separate regime for pre-marketing. Pre-marketing is subject to the same financial promotion rules as any other marketing of a fund in the UK.

Other forms of possible placement options for fund interests outside fund regulations

The UK national private placement regime will not apply to: “an offering or placement of units or shares of an AIF to an investor made at the initiative of that investor” (AIFM Regulations, Reg 47). A confirmation from the investor that the offering or placement of units or shares of the AIF was made at its initiative should normally be sufficient to demonstrate that the marketing is at the initiative of the investor, provided this is obtained before the offer or placement takes place. Industry practice also seems to be that investment firms acting for the investor (e.g. investment managers and advisers) can make the initial approach to the AIF / AIFM and complete such confirmations on behalf of the investor. However, AIFMs and investment firms acting for AIFs / AIFMs should not be able to rely upon such confirmation if this has been obtained to circumvent the requirements of AIFMD.

2. Consequences of non-compliance with placement regimes for fund interests

Carrying out marketing in contravention of the UK private placement regime is defined as “unlawful marketing” under the AIFM Regulations.

An agreement entered into by a customer as a consequence of unlawful marketing by a person who is not authorised by the FCA is unenforceable and the customer is entitled to recover money paid under the agreement and compensation for any loss sustained. (However, the court may allow the agreement to be enforced and money to be retained if it is satisfied that it is just and equitable.) If an AIFM or an investment firm authorised by the FCA carries out unlawful marketing, this is actionable at the suit of a private person who suffers loss as a result of such marketing, subject to the defences and other incidents applying to actions for breach of statutory duty.

For persons who are not authorised by the FCA, unlawful marketing is a criminal offence subject to imprisonment for a term not exceeding three months (or, on indictment, for a term not exceeding two years) or a fine, or both.

FCA authorised persons who carry out unlawful marketing may be sanctioned through public censure, a financial penalty and potentially enforcement action by the FCA leading to the withdrawal of FCA authorisation.

UK Regulated Activity Perimeter

Persons who are seeking to market fund interests under the UK national private placement regime also need to consider if their activities will amount to them carrying on regulated activities in the UK for which an FCA authorisation would be required unless an exemption applies.

Carrying on unlawful regulated activity without the necessary authorisation is also a criminal offence (which can lead to imprisonment or a fine or both) and give rise to unenforceable agreements and claims by investors for the return of property and any loss suffered.