The purpose of this Client Alert is to consider some practical issues for managers when undertaking pre-marketing activities in the European Union following the implementation of the Cross Border Distribution of Funds Directive (the “Directive”). The requirements of the Directive are well known, so it is not the purpose of this Alert to go through those in detail but to concentrate on matters that managers should bear in mind.
What is pre-marketing and what does the Directive permit?
We need first of all the definition of pre-marketing. From the amended Article 4, it is 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 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 too invest in the units or shares of that AIF or compartment.”
In broad terms, EU managers will be permitted to undertake pre-marketing in all Members States subject only to a requirement to notify their home state about such activities within two weeks of commencing pre-marketing.
Have all Member States implemented the Directive?
Although the date for implementation was 2 August 2021, many EU countries have not yet done so. In particular, Finland, Italy, the Netherlands, Norway, Spain, and Sweden have all not yet done so and will not do until later in the year or next year. Any pre-marketing activities by managers will therefore be on the basis of the old law. For non-EU managers (see below on this), this will mean carrying on under the old provisions, but EU managers based in other Member States could reasonably take the view that if they have submitted the letter notification to their home authorities who have then transmitted it to host countries that have not yet implemented the Directive they will nevertheless be able to pre-market there under the new rules.
So, is there pre-pre-marketing?
Given the wide definition of pre-marketing set out above, realistically any discussion with potential investors about a new fund at whatever level of detail is likely to constitute pre-marketing and therefore trigger the notification requirement, so managers should bear this in mind. Any discussions about the manager, its general investment philosophy and previous funds, however, would amount to pre-pre-marketing and would not trigger the notification requirement. Managers should therefore consider carefully what they want to discuss with investors before starting discussions.
Does the Directive apply to non-EU AIFMs?
The definition given above refers only to EU AIFMs. Given that the Commission was specifically requested to clarify during the consultation period whether the provisions should apply to non-EU AIFMs and did not respond, it would seem to be a reasonable view that the legislation is not intended to cover non-EU managers. Nevertheless many countries have chosen voluntarily to extend this to non-EU managers. In particular, non-EU AIFMs who pre-market in (of the major markets) Finland, Germany, Luxembourg, the Netherlands, and Sweden will need to notify each of those authorities. It is worth noting that non-EU managers may not pre-market in Norway or Denmark, and, since registration under Article 42 of the Directive is not possible in Italy or France, the issue or pre-marketing there does not arise.
What about reverse solicitation?
Article 30a(2) provides that any subscription by investors within 18 months of a manager having begun pre-marketing shall be considered to be the result of “marketing” and shall be subject to the usual passport notification (EU AIFM)/Article 42 registration procedures (non-EU AIFM). It is unclear whether this limitation of reverse solicitation is intended to cover only those investors that were contacted during the pre-marketing phase or whether it is intended to cover all investors in that country. It does appear, however, from the implementation measures in individual Member States that most countries are taking the more limited approach and precluding any reverse solicitations where there has been pre-marketing. This means that managers should take great care in deciding whether they want to undertake pre-marketing in any country where they have existing legitimate reverse solicitations. In an unfortunate policy decision, this has turned marketing into a game of double or quits.
As a practical matter, it has always been possible to de-register a fund that has been registered under Article 42 or under the passport arrangements where no investors have been obtained in any individual country. Article 32a now specifically permits this but contains a very strange provision that states that for a period of 36 months from the deregistration date the manager shall not engage in pre-marketing of funds that have “similar investment strategies or investment ideas”. Member States’ regulatory authorities seem to be unclear what this is intended to cover, and it is difficult to work out the policy behind it. One argument is that it is intended to be some form of anti-avoidance measure to prevent a fund being registered, deregistered and then subsequently pre-marketed in its existing or similar form, but the current prevailing view seems to be that the prohibition will apply not only to that fund but also other similar funds. In practical terms, this means that if a manager deregisters, for example, Private Equity Fund V, it will be prevented from pre-marketing Private Equity Fund VI for a period of 36 months. It is not easy to understand the justification for this, but managers should bear this in mind.
The United Kingdom
A final word about the United Kingdom: following Brexit, the provisions of the Directive do not apply to the UK, and the Government does not intend to implement them. This means that pre marketing is permitted in the UK as before, and there is no need to notify the FCA about any pre-marketing. The restrictions set out above regarding reverse solicitation and the consequences of deregistration will not apply.