Upcoming new rules on pre-marketing and marketing of AIFs for Luxembourg AIFMs

Regulation (EU) 2019/1156 (the “Regulation”) and Directive (EU) 2019/1160 (the “Directive”) and (together the “Cross-Border Marketing and Distribution Rules”) introduced new rules concerning the cross-border marketing and distribution of investment funds within the EU and amended the Regulations (EU) 345/2013, (EU) 346/2013 and (EU) 1286/2014, respectively Directives 2009/65/EC and 2011/61/EU).

The Regulation entered into force on 1 August 2019, except for certain articles relating to the requirements for marketing communications and the publication of national provisions concerning marketing requirements by national supervisory authorities. These requirements set out in the Regulation on marketing communications will be effective as of 2 August 2021, which is the same date upon which the Directive should be transposed into Luxembourg law and which covers the new rules on pre-marketing and de-notification of marketing arrangements.

The aim of the Cross-Border Marketing and Distribution Rules is to standardize and improve the cross-border distribution of investment funds within the EU by introducing certain new concepts and removing certain existing regulatory requirements. This publication does not provide a comprehensive description of the Cross-Border Marketing and Distribution Rules but rather highlight relevant items for alternative investment fund managers (“AIFM”) in the context of (pre-)marketing alternative investment funds (“AIF”) to professional investors. 

I. Pre-marketing

The below rules on pre-marketing are subject to the implementation of these rules into Luxembourg law. As at the date of the present publication, the implementation process is ongoing in the Luxembourg parliament.   

Upon implementation of the Directive into Luxembourg law (which should in principle be implemented and effective as of 2 August 2021), Luxembourg AIFMs engaging in “pre-marketing” with professional investors (i.e. activities carried out prior to a marketing notification) will be subject to new rules as follows:

1. Definition of “pre-marketing”

The key features of the “pre-marketing” definition are:

  • direct or indirect information or communication on investment strategies or ideas;
  • provided by the AIFMs themselves or on their behalf[1];
  • to professional investors domiciled or having their registered office in the EU;
  • for the purpose of testing the investors’ appetite to invest in the AIF (or a compartment thereof) that is not yet established, or which is established but prior to a marketing notification under the AIFM Directive;
  • provided that such communication/information is not the equivalent of an offer or placement to the potential investors to invest in the AIF (or a compartment thereof).

The communication of information will not qualify as “pre-marketing” if the information that is provided to potential professional investors:

  • is sufficient to allow investors to commit to subscribe to shares or interests of an AIF;
  • is equivalent to a subscription form or similar document whether in a draft or final form;
  • amounts to a final form of the constitutional documents or offering documents of a not-yet established AIF.

In the context of a pre-marketing activity, draft offering documents of an AIF may only be provided to potential professional investors if they do not contain sufficient information to allow such investors to take an investment decision and if such offering documents clearly state that (i) they do not constitute an offer to subscribe to the AIF’s shares or interests and (ii) the information included in the offering documents should not be relied upon because the information is incomplete and may be subject to change.

The AIFMs must ensure that investors do not subscribe to the AIF’s shares or interests through pre-marketing but only further to a marketing notification under the AIFM Directive.

2. Pre-marketing notification procedure

AIFMs will have to notify their local supervisory authorities within two weeks of beginning their pre-marketing activities by informal letter or electronic means indicating:

  • the Member States and the periods during which the pre-marketing is taking or has taken place;
  • a brief description of the pre-marketing, including information on the investment strategy;
  • to the extent applicable, a list of the AIFs (or compartments thereof) subject to the pre-marketing activity.

3. Pre-marketing and reverse solicitation

Any subscription by professional investors to an AIF’s shares or interests that is made within a timeframe of 18 months as from the beginning of the pre-marketing activities shall be considered to be made on the basis of the marketing activities subject to the applicable marketing notification under the AIFM Directive and will not be considered as reverse solicitation. Therefore, engaging in pre-marketing activities, in any EU jurisdiction, will automatically mean that none of the subscriptions made by professional investors in the subsequent 18 months from the start of the pre-marketing is deemed to be the result of a reverse solicitation.

Upon implementation of the Directive into Luxembourg law, it is expected that the Luxembourg supervisory authority provides guidelines on the modalities of such pre-marketing notification.

II. De-notification of marketing

The Directive also provides rules on the de-notification of marketing activities which have been carried out pursuant to the marketing notification process under the AIFM Directive. Such rules will have to be implemented into Luxembourg law by 2 August 2021. 

The new de-notification requirements provide that an AIFM may submit a de-notification request to its home regulator in respect of an AIF that was marketed by virtue of the marketing notification process under the AIFM Directive where all the following conditions are met:

  • except in the case of closed-ended AIFs, an offer to redeem all of the AIF’s shares or interests has been made under certain conditions;
  • the intention to terminate the marketing arrangements for the AIF’s shares or interests hold by the investors in the host EU member state should be made publicly available by several means, including electronic means;
  • any contractual arrangements with the financial intermediaries or delegates shall be modified or terminated as of the date of the de-notification in order to prevent future transactions with such AIF’s shares or units;

Following such de-notification, the AIFM shall be prohibited for a period of 36 months to engage in pre-marketing of the AIF’s shares or interests that was referred to in the notification or similar investment strategies or investment ideas in the Member States identified in the de-notification. The AIFM must however continue to provide to investors remaining invested in the de-notified AIF (and to its home regulator) with the reporting and information disclosures information set out under articles 22 and 23 of the AIFM Directive.

III. Marketing information

The Regulation introduced new harmonized requirements applicable to marketing communications relating to AIFs made by AIFMs which will be effective as of 2 August 2021. Information provided to retail investors or information provided by UCITS management companies are not covered in the present publication.

As of 2 August 2021, AIFMs shall insure that the marketing communications will:

  • be identifiable as marketing communications;
  • describe the risks and the rewards of subscribing to units or shares in an equally prominent manner;
  • be fair, clear and not misleading;
  • -not contradict or diminish the significance of the information contained in the information to be disclosed to the investors as per the AIFM Directive requirements.

The European Securities and Markets Authority (“ESMA”) has issued its final report relating to the guidelines on marketing communications under the Regulation on cross-border distribution of funds on 27 May 2021 (the ESMA Guidelines).  The Member States including the CSSF will have to confirm whether they intend to comply with these guidelines. 

The Regulation provides for an ex-ante verification of marketing communications in case of communication to retail investors.

[1] Only regulated third-parties may engage in pre-marketing on behalf of the AIFM, i.e. regulated investment firms,  credit institutions, UCITS management companies, AIFMs or tied agents within the meaning of the AIFM Directive. 

Aurélien Hollard, Luxembourg Partner | Avocat à la Cour

Benjamin Bada, Luxembourg Partner | Avocat à la Cour