This Focusing on Funds update looks at the hot topic of funds marketing and proposals for a pre-marketing regime for alternative investment funds. This is an area we are often asked to advise on as various forms of "soft marketing" activity trigger regulatory filing requirements in some but not all countries. In March, the Commission published proposals which subsequently were amended by the Council and the Parliament to make them more workable.
What is pre-marketing?
Pre-marketing (or "soft marketing") is essentially communications with potential investors before they commit to subscribe for fund interests (e.g. units or shares). It ranges from early stage roadshow presentations and "teaser documents" in order to test investors' interest in certain investment strategies, to providing draft fund documents to potential investors. Various types of pre-marketing activity trigger regulatory filing requirements in some, but not all, countries and there is no uniform approach across the EU.
Why is it important?
We are frequently asked to advise fund manager clients on what type of pre-marketing activity is permitted in various EU member states before regulatory filings are required. Failing to make the regulatory filings can have significant consequences.
Proposed AIFMD definition of "pre-marketing"
In March, the European Commission proposed changes to the Alternative Investment Fund Managers Directive (AIFMD) and the UCITS directive to facilitate cross-border marketing of funds. These included the introduction of a "pre-marketing" regime in the AIFMD. Activity that would fall within the prescribed definition of pre-marketing would have to be permitted across the EU without any regulatory filing requirements (see further our RegZone Article).
Subsequently, the Council and the European Parliament proposed changes to the Commission's proposal which would make it more practical and workable. The three proposals are summarised below.
Impact on funds and investors
Currently, the proposals only apply to EU AIFMs and AIFs, and will therefore give helpful certainty to these. But this means that the position for third country managers and AIFs remains uncertain as local regulators will still be able to determine what type of pre-marketing activity will trigger regulatory filings. Local regulators can prevent marketing and also impose additional conditions over and above the minimum AIFMD requirements.
The Commission's, the Council's and the European Parliament's proposals are summarised below (and in the table). These three texts will be further negotiated and combined into a final version. The final text is scheduled to be adopted before the European Parliament elections in May 2019 and implemented in Member States by May 2021.
The Commission's original proposal
The European Commission proposed that the pre-marketing regime would apply to authorised EU AIFMs (and this is also the case for the Council and the Parliament's proposals). The Commission proposed that it would not be possible to pre-market an AIF that was already established. Also, it would not be possible to send draft or final fund documents to investors during the pre-marketing phase.
The Council's proposal
The Council of the European Union's proposal was less restrictive. In its final compromise proposal, the Council proposed that it would be possible for authorised EU AIFMs to pre-market an AIF which is established, but not yet notified for marketing to professional investors in the EU. It would also be possible to send prospectuses, offering and constitutional documents in draft form as part of pre-marketing. However, information provided to professional investors should not enable them to commit to acquiring units or shares of a particular AIF.
The European Parliament's proposal
On 2 October, the Economic and Monetary Affairs Committee (ECON) of the European Parliament published its latest draft report on the proposed pre-marketing definition. This proposal also permits pre-marketing by an EU AIFM of an established AIF (or a compartment of an AIF) as long as it was not established in the same EU state as the potential investor. ECON also suggested that within 18 months of pre‑marketing, investors should only be allowed to acquire units or shares in an AIF under the EU wide AIFMD marketing passport. The proposal does not apply to third country AIFMs or AIFs.
The proposals of the Commission, the Council and the Parliament are summarised below.
Does the regime apply to EU AIFMs only?
Is it possible to pre-market an established AIF?
Yes, as long as the AIF is not established in the same EU state as the investor.
Can draft fund documents be sent as part of pre-marketing?
Yes, but it should not be possible for investors to subscribe.
Is it possible to pre-market an AIF and subsequently rely on reverse solicitation (i.e. passive marketing on the investor’s request without need for regulatory filings)?
The pre-marketing proposals will be important to EU AIFMs and AIFs but would have had even greater impact on the alternative fund industry if they also had applied to third country AIFMs and AIFs (which would include the UK following a potential hard Brexit). It remains to be seen if the position for third country scenarios will be influenced by these proposals. This will ultimately be up to each EU member state to decide.
The Commission's proposed directive (original proposal) and RegZone Article on the original proposal
The Council's compromise proposal regarding pre-marketing, compromise proposal with other changes
The Parliament's (ECON) latest draft report (dated 2 October 2018).