Revisiting European Marketing Rules

At the age of the expansion of alternative investment funds collecting more and more commitments from institutional investors in the search for yield, the European rules on marketing are returning to the scene. Brexit represents another reason to revisit the European marketing regime and the benefit of the related passport granted to MIFID entities and AIFMs.

Any AIFM established in a Member State is allowed to market the interests of the funds to professional investors, as defined under MIFID, subject to a prior notification to its home regulator. The notification is a straightforward process as the AIFM has to provide its program of operations identifying the AIFs it intends to market, the list of jurisdictions concerned and information on where the AIFs are established. The AIFM has to further provide the regulator with the constitutive documents of the AIFs, identification of the depositary(ies) and the description of information provided to investors. On this basis, the home regulator of the AIFM will inform it, within 20 working days at the latest following receipt of the complete notification file, of whether it can start marketing the AIFs identified in the notification.

At the time of the implementation of the AIFMD into national laws, there have been a few surprises with certain regulators requiring the payment of registration fees in advance of the notification or adding other requirements such as the appointment of a paying agent or the insertion of certain statements in the documents of the AIFs before being made available to investors.

Other uncertainties arose in respect of the interpretation of marketing, which is defined in the European Directive (EU) 2011/61/EU on Alternative Investment Fund Managers ("AIFMD")1 as "a direct or indirect offering or placement at the initiative of the AIFM or on behalf of the AIFM of units or shares of an AIF it manages to or with investors domiciled or with a registered office in the European Union." Without any more precise guidance at a European level regarding what exactly marketing consists of, the position of the different national competent authorities appeared to vary.

Commonly, it was admitted that marketing takes place when the AIF, the AIFM or an intermediary on their behalf seeks to raise capital by actively making units or shares of an AIF available for firm purchase by a potential investor.

In this respect, in Luxembourg it is usually considered that providing draft documents in relation to an AIF by the AIFM to prospective investors does not constitute a marketing activity, as long as such documents cannot be used by the prospective investors to subscribe formally or commit to subscribe shares or units of the AIF. Accordingly, a marketing activity takes place as soon as the investors are provided with documents that enable them to formally subscribe or commit to subscribe to shares or units of an AIF, for instance if the fund documents are in their final form and may be directly completed and signed by the investor. This is not the case if the documents provided cannot be executed to validly bind the investor and the founder of the AIF.

This flexibility is certainly welcome in the context of alternative investment funds, where anchor investors or investors making a significant commitment are likely to negotiate certain terms of the fund with the manager, such as the governance, the allocation of profit, the possible cases for a removal of the manager and similar issues.

That being said, this means in practice that the first commitment of investors may only be accepted after the formation of the fund and the implementation of the notification process to activate the marketing passport in respect of a particular fund.

The so-called reverse solicitation exemption, which would permit one to skip the 20-day notification process, is particularly restrictive and corresponds to a limited number of circumstances according to facts. The European Commission defines reverse solicitation as "a request by a professional client regarding units or shares of a specifically designated existing fund without a prior direct or indirect offer or placement (i.e., solicitation) from the management company or on its behalf. This contact is thus to be established only on the investor's initiative and may not constitute a reaction to previous offers or placements."2 Such previous offers could consist of advertising, distribution of AIF constitutive documents, presentations during road shows or distance marketing by any means of communication (telephone, website, etc.). The AIFM has the burden of proof as regards the investors' initiative to invest in an AIF managed by the AIFM to be able to rely on the reverse solicitation exemption.

As referred to in the AIFM Law, the right to market the units or shares of the AIF under the marketing passport is granted to the AIF itself or its AIFM. In practice, the AIF will be represented by the members of its governing body, i.e., in the case of a corporation, the directors, or in the case of a partnership, the representative of the general partner, being the members of the board of directors of such general partner, or their employees if any.

However, AIFMs are very often external service providers that do not provide such distribution services despite the fact that they are the ones entitled to activate the marketing passport on behalf of the AIF.

As a consequence, the marketing function is often delegated by the AIFM to other entities, being part of the same group as the promoter of the AIF or being external distributors. It has to be ensured that the rules for delegation under the AIFM Law are complied with when appointing such distributors or placement agents.

New European legislation has been adopted recently in respect of the cross-border distribution of funds, namely Directive 2019/1160/EU3 ("Cross-Border Distribution Directive") and Regulation 2019/1156/EU4 ("Cross-Border Distribution Regulation") of 20 June 2019, which aim to harmonize further distribution rules among the Member States applicable to actors in the financial sector.

Their purpose, among others, is to provide a harmonized definition of pre-marketing and the conditions under which EU AIFMs can engage in pre-marketing activities. Provisions of the Cross-Border Distribution Regulation on pre-marketing are applicable from 1 August 2019 for qualifying venture capital funds and social entrepreneurship funds, and those of the Cross-Border Distribution Directive, in respect of UCITS and AIFs, must be implemented by Member States in their national regulatory framework by 2 August 2021.

Under the new regulatory framework, pre-marketing means the provision of information or communication, direct or indirect, on investment strategies or investment ideas by an EU AIFM or on its behalf, to potential professional investors domiciled or with a registered office in the Union in order to test their interest in an AIF which is not yet established, or which is established but not yet notified for marketing and which does not amount to an offer or placement to the potential investor to invest in the units or shares of that AIF.

Concerning draft prospectuses or offering documents, EU AIFMs will ensure that the information provided is not sufficient for investors to take investment decisions and clearly state that:

(i) they do not constitute an offer or an invitation to subscribe to units or shares of an AIF; and

(ii) the information provided therein should not be relied upon because it is incomplete and may be subject to change.

In terms of procedure, EU AIFMs intending to engage in pre-marketing activities will be required to inform the supervisory authorities of their home Member State within two weeks of the beginning of the pre-marketing. The letter should state: (i) the Member States in which, and the periods during which, the pre-marketing will take place or has taken place; (ii) a short description of the pre-marketing (including data on the investment strategies presented to prospective investors); and, where relevant, (iii) a list of AIFs subject to pre-marketing. Upon receipt of the notification, the supervisory authorities of the home Member State of the AIFM will promptly inform the competent authorities of the Member States in which pre-marketing is performed. In turn, the authorities may request further information on the pre-marketing with respect to their own territories.

It is worth noting that the above procedure will significantly diminish the scope of reverse solicitation. Indeed, any subscription made by professional investors within 18 months from the beginning of the pre-marketing activities by the AIFM will be considered to be a result of pre-marketing and subject to the notification procedure referred to above.

Article first published in Agefi, December 2019.

1 Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers, amending Directives 2003/41/EC and 2009/65/EC, and Regulations (EC) No 1060/2009 and (EU) No 1095/2010.

2 European Commission, "Report from the Commission to the Council and the European Parliament – Accelerating the capital markets union: addressing national barriers to capital flows" (24 March 2017), Section 2.1.1. Marketing requirements.

3 Directive (EU) 2019/1160 of the European Parliament and of the Council of 20 June 2019, and amending Directives 2009/65/EC and 2011/61/EC with regard to cross-border distribution of collective investment undertakings.

4 Regulation (EU) 2019/1156 of the European Parliament and of the Council of 20 June 2019 on facilitating cross-border distribution of collective investment undertakings, and amending Regulations (EU) No 345/2013, (EU) No 346/2013 and (EU) No 1286/2014.