Pre-marketing and reverse solicitation of alternative investment funds in Europe.
The European Commission originally announced a proposal for a supplementary AIFM Directive (AIFMD 2) approximately sixteen months ago. After some back and forth though the EU legislative process, the text of the new directive has been agreed. The two year implementation period began on 2 August 2019, which means that all member states will be required to apply the new rules from 2 August 2021.
Background
Back in March 2018, the European Commission announced a proposal to amend the Alternative Investment Fund Managers Directive (AIFMD) to provide for a uniform regime for "pre-marketing" of alternative investment funds (AIFs) across Europe.
Political agreement and legislative approval of AIFMD 2 has now been concluded at EU level, leaving just the national level implementation to follow over a period of two years.
So what has changed and where does it leave us?
Pre-marketing – position prior to AIFMD 2
Until now AIFMD has only regulated “marketing” of AIFs to investors, but not “pre-marketing”. The problem with this is that an activity that in one member state would be regarded as merely pre-marketing (and which therefore would not trigger the AIFMD rules) can be treated as marketing activity in another member state (and which therefore does trigger the AIFMD rules). So, the stage at which you have to notify a local regulator, or register your fund with a local regulator, can vary dramatically from jurisdiction to jurisdiction. The new rules set out in AIFMD 2 seek to harmonise the position across all member states in order to help address this problem.
Pre-marketing: the new position under AIFMD 2 (Original Draft Position vs Final Position)
The table below summarises how certain key aspects of the definition of pre-marketing (and the conditions to qualifying as pre-marketing information) in the original draft of AIFMD 2 have ended up being changed in the final wording:
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Original Draft Position
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Final Position
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Restricted to information in relation to an AIF which was not yet established.
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Now extended to include an AIF which is established, but not yet notified for “marketing” (as defined by AIFMD) – an important improvement, allowing pre-marketing even after the fund vehicle has been legally established.
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Excludes documentation enabling investors to commit to investing in a particular AIF.
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No change.
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Excludes information which amounts to a prospectus, offering documents or constitutional documents, whether in draft or final form.
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Such information in draft form, but not in final form, can now constitute pre-marketing - a vital improvement, allowing pre-marketing on the basis of a draft PPM/LPA - provided it carries specified health warnings making it clear that it is not an offer or invitation to subscribe and cannot be relied upon.
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Pre-marketing notification
The AIFM must notify its home member state regulator of the pre-marketing within two weeks of its commencement. This is more bureaucracy than currently required in those member states with a liberal interpretation of marketing, but at least it avoids the need to make pre-marketing notifications in multiple jurisdictions.
Reverse solicitation
The final version of AIFMD 2 retains the provision from the earlier drafts to the effect that any subscription by an investor in relation to an AIF which has been the subject of pre-marketing is considered to be as a result of "marketing" and notification/registration shall be required accordingly. This puts to rest any residual argument about whether you can argue there has been reverse solicitation of an investor to whom there has been promotional activity of a pre-marketing nature: in short, this is definitely not possible. However, there is still a contentious provision in the final version of AIFMD 2 which says that when a subscription takes place within 18 months of the AIFM beginning pre-marketing this will be deemed to have resulted from marketing.
The key issue here is that it is unclear whether the restriction applies to each investor, to each country or across the whole EU. One reading of the text would imply that if you start pre-marketing in one country then it puts all EU investors offside for the next 18 months as regards the possibility of reverse solicitation, even if as a factual matter another investor genuinely approached a manager entirely on its own initiative. Another reading would imply that it only puts you offside with investors in the country in which the pre-marketing took place. Both of these possible interpretations have led some to speculate, in effect, the near-death of reverse solicitation in the EU for AIFs. An alternative view (i.e. that this restriction is to be looked at only on an investor-by-investor basis) can also be argued based on the text of AIFMD 2, and this is obviously the interpretation that is more favourable to managers; however, it is far from clear that regulators will adopt this more benign approach.
Non-EU AIFMs
On its face, AIFMD 2 applies only to pre-marketing by EU AIFMs, not non-EU AIFMs. The approach to pre-marketing by Non-EU AIFMs therefore remains within the discretion of member states. However, Recital 12 to AIFMD 2 states that complying with the new rules should not disadvantage EU AIFMs over non-EU AIFMs, which would suggest that regulators will probably apply the same definition of pre-marketing to non-EU AIFMs as well. It is unclear how the overall procedure would work for a non-EU AIFM as the procedure in AIFMD 2 presupposes that the AIFM is regulated in the EU and that its home regulator will take care of the process of notifying the other EU regulators in the countries where pre-marketing will be undertaken.
We have prepared a separate, more detailed newsflash that looks in more detail at the position solely from the point of view of a non-EU manager selling non-EU funds into Europe.
Brexit
Assuming that the UK has left the EU before the 2 August 2021 date for implementation of AIFMD 2 into national law, the question arises as to whether the UK will adopt equivalent provisions? The answer to this question is bound up with the ongoing political debate in the UK around whether a close relationship with the EU is desirable or not. Watch this space!
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