On April 16, 2019, the European Parliament voted in its plenary session to adopt a new legislative package relating to the cross-border distribution of collective investment funds. This legislative package will take the form both of a new directive (the CBDF Directive) and a new Regulation (the CBDF Regulation).
Amongst other changes, the new legislative package will amend the existing Alternative Investment Fund Managers Directive (AIFMD) with the objective of harmonising the ability for European Union (EU) alternative investment fund managers (AIFMs) to conduct preliminary fund marketing activities (pre-marketing) across the EU and setting out rules on reverse solicitation relating to such pre-marketing activities.
The new marketing rules apply, for the most part, to EU-authorised AIFMs marketing their funds under the AIFMD marketing passport; they do not apply to non-EU AIFMs marketing funds in the EU under the AIFMD private placement regime. However, the AIFMD as a whole is likely to be reviewed during the latter part of 2019 and it seems likely that some of the new rules will then be applied to non-EU AIFMs who market their funds into the EU under the AIFMD private placement regime.
Certain of the new rules also apply to Undertakings for the Collective Investment in Transferable Securities (UCITS); however, the rules that are the focus of this update (pre-marketing and reverse solicitation) are relevant only for AIFMs marketing alternative investment funds (AIFs).
In the UK, the provision of preliminary documents such as term sheets, pitch books and draft/skeletal offering documents is generally considered not to constitute ‘marketing’.
At present, the AIFMD defines “marketing” to mean:
“…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 Union.”
To date, individual EU member states have applied different interpretations as to what constitutes an “offer or placement” of an AIF and, thus, what amounts to “marketing” of an AIF. For example, in the UK, AIFMD “marketing” is considered to take place only when a person makes AIF units or shares “available for purchase” by a potential investor. In the UK, the provision of preliminary documents such as term sheets, pitch books and draft/skeletal offering documents is generally considered not to constitute “marketing”; it is only when a document specifying all the final contractual terms is provided to an investor that “marketing” is considered to take place. In other member states such as Sweden and Finland, the provision of such preliminary documentation is already considered to constitute “marketing” (assuming the AIF is in existence).
The implication of an activity constituting “marketing” is that:
• in the case of an EU AIFM marketing an EU AIF in another member state, an AIFMD marketing passport notification needs to be submitted; and
• in the case of an EU AIFM marketing a non-EU AIF in another member state or a non-EU AIFM marketing an AIF (of any domicile) in any member state, an AIFMD private placement notification must be made in that member state (assuming a local AIFMD private placement regime is available).
The CBDF Directive aims to eliminate the existing divergent approaches across member states by introducing a definition for, and rules governing, pre-marketing activities conducted by EU AIFMs in particular.
The final text for the CBDF Directive will add the following definition of “pre-marketing” into the AIFMD:
“…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 or a compartment, which is not yet established or which is established, but not yet notified for marketing in accordance with Article 31 or 32, in that Member State where the potential investors are domiciled or have their registered office and which in each case does not amount to an offer or placement to the potential investor to invest in the units or shares of that AIF or compartment[.]” (emphasis added)
A new Article 30a of the AIFMD (inserted by the CBDF Directive) will set out conditions for pre-marketing by an EU AIFM. For an EU AIFM to engage in pre-marketing activities without triggering the AIFMD marketing notification requirements (which are contained in Articles 31 and 32 of the AIFMD), the information presented to potential professional investors must not:
• be sufficient to allow investors to commit to acquiring units or shares of a particular AIF;
• amount to subscription forms or similar documents, whether in a draft or a final form; or
• amount to constitutional documents, a prospectus or offering documents of a not-yet-established AIF in a final form.
Furthermore, where a draft prospectus or offering documents is provided, such documents should not contain information sufficient to allow investors to make investment decisions and should clearly state that:
• the document does not constitute an offer or an invitation to subscribe to units or shares in the AIF; and
• the information presented in the documents should not be relied upon because it is incomplete and may be subject to change.
In practice, this will mean AIFMs will not be able to simply label what is really a final offering document as a “draft” and try and claim that this is “pre-marketing;” member state regulators are likely to treat that document as triggering the marketing notification requirements, despite the “draft” stamp.
EU AIFMs will be required, within two weeks of commencing pre-marketing activities, to notify its relevant competent authority of the periods of time in which the pre-marketing took place, a description of the pre-marketing activities (including a description of the investment strategies presented) and, where relevant, a list of the AIFs and compartments of AIFs that were the subject of pre-marketing.
The CBDF Directive will also add new provisions in the AIFMD to address the ability of EU AIFMs to rely on reverse solicitation where pre-marketing has been conducted.
Unsurprisingly, EU AIFMs will have to ensure that investors contacted as part of pre-marketing activities may acquire only units or shares in the relevant AIF subject to compliance with the marketing restrictions in Article 31 or 32 (as applicable) of the AIFMD. This position is already well-understood, and therefore, is unlikely to be of much impact.
Of greater significance, however, is that the CBDF Directive will amend the AIFMD so as to consider any subscription by professional investors, within 18 months of the EU AIFM beginning pre-marketing activities, to be “considered the result of marketing”. The result is that the EU AIFM would be required to carry out the marketing notifications in Article 31 or 32 (as applicable) of the AIFMD in all cases.
In other words, for a period of 18 months from the time the EU AIFM begins its pre-marketing activities within the relevant EU member state, any investor (even those that had not been pre-marketed to) may invest only in the relevant AIF, provided the EU AIFM has complied with the marketing restrictions in Article 31 or 32 (as applicable) of the AIFMD.
The CBDF Directive will additionally amend the AIFMD to restrict the ability for an EU AIFM to appoint certain third parties to engage in pre-marketing activities on their behalf. Once the changes take effect, it will be possible for only authorised EU financial institutions (i.e. Markets in Financial Instruments Directive investment firms, Capital Requirements Directive credit institutions, UCITS management companies and other EU AIFMs) to engage in pre-marketing activities on behalf of EU AIFMs. This is unlikely to prove problematic as many continental EU member states already require a placement agent engaging with local investors to be locally authorised or, otherwise, reliant on an EU financial services passport.
In addition, the new legislative package contains other requirements that apply both to AIFMs, and to UCITS:
• an amendment to the AIFMD and to the UCITS Directive (inserted by the CBDF Directive) that prescribes a standard procedure for the “de-notification” of an AIF for marketing purposes within an EU member state;
• rules (set out in the CBDF Regulation) on “marketing communications” (in essence, requiring that such communications describe the risks and rewards of purchasing AIF shares in an equally prominent manner, and are fair, clear and not misleading); and
• a requirement (set out in the CBDF Directive) for AIFMs (in this case, whether EU or non-EU) to make available “facilities” to, in effect, act as a local paying agent, facilitate the provision of information to investors and act as the contact point for the local regulator. However, this requirement applies only in relation to AIFMs marketing AIFs to retail investors. In respect of UCITS, existing rules in the UCITS Directive relating to local facilities are being replaced by revised rules contained in the CBDF Directive.
As noted above, the European Parliament adopted the provisional text for the CBDF Directive and CBDF Regulation on April 16, 2019. Once also formally adopted by the Council of the EU (a process expected to be a formality, given political agreement on the legislative package had been agreed both by the Parliament and the Council on February 27, 2019), the CBDF Directive and the CBDF Regulation will each be published in the Official Journal of the European Union. The timing for publication in the Official Journal is not yet fixed, but likely to be during Q3 2019.
The CBDF Directive and CBDF Regulation will then become law 24 months and 20 days after publication in the Official Journal. As things stand, the UK should have exited the EU by that time. Nonetheless, the UK will likely adopt the CBDF Directive and the CBDF Regulation as UK law. A new Financial Services (Implementation of Legislation) Bill is being considered by the UK Parliament, which would provide the power for the UK to implement and make changes to a specified list of European Union financial services legislation agreed or in negotiation at the point of exit with implementation dates falling in the two years after exit (in-flight files). Among others, the in-flight files include the CBDF Directive and CBDF Regulation.
In addition, as noted, the AIFMD is being reviewed this year (2019). Although most of the provisions of the CBDF Directive and CBDF Regulation (including as to “pre-marketing” and “reverse solicitation”) apply only to EU authorised AIFMs, it seems likely that these new rules will find their way into the revised AIFMD marketing rules applicable to non-EU AIFMs in some form.