On 10 August 2015, the CSSF published a new version of its AIFMD Frequently Asked Questions (FAQ).
The revised FAQ clarifies the scope of the activities which may be carried out in Luxembourg without triggering the need to passport or notify an AIF about marketing in Luxembourg.
The update solves many practical issues faced by asset managers when organising their fundraising.
The Luxembourg act of 12 July 2013 on alternative investment fund managers (AIFMs) implemented the AIFMD into Luxembourg law (the AIFM Act). The AIFMD is a maximum harmonisation Directive, which means that EU Member States have limited discretion for deviation from the requirements in the Directive. Therefore, not surprisingly, Luxembourg lawmakers have adopted a copy-out approach, and the text of the AIFM Act mirrors that of the AIFMD.
However, the AIFMD and its implementing measures remain silent on a number of key aspects relating to marketing, and, hence, EU Member States and their respective regulatory authorities have some latitude on certain aspects which are crucial for asset managers.
As a result, there are discrepancies in marketing requirements from one country to another. In this context, the Luxembourg supervisory authority (the Commission de surveillance du secteur financier, the CSSF) published today a new version of its FAQ, providing helpful clarification on marketing rules under the AIFM Act. This update brings the clarity and predictability which market participants need in order to organise their fundraising activities in Luxembourg or towards Luxembourg investors.
The definition of marketing under the AIFM Act is a carbon-copy of the definition set out in the AIFMD. Marketing is defined as the “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”.
The revised FAQ clarifies 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 the AIF available for firm purchase by a potential investor”. The revised FAQ further clarifies that “the marketing activity has to take place on the Luxembourg territory to qualify as marketing in Luxembourg”.
Based on these clarifications, the following do not constitute ‘marketing’ within the meaning of the AIFM Act:
activities that do not entail the delivery of documents which may be used by potential investors for investing (or committing to invest) in the relevant AIF (see ‘pre-marketing’ under item 1. below);
activities that are not carried out at the initiative of the AIFM, the AIF or an intermediary of the AIFM or the AIF (see ‘reverse solicitation’ under item 2. below); and
activities that are not carried out (or deemed carried out) “on the Luxembourg territory” (see ‘territoriality and distance marketing’ under item 3. below).
The revised FAQ confirms that “the presentation to prospective investors of draft documents in relation to an AIF [does not] constitute a marketing activity […] provided such documents cannot be used by the prospective investors to formally subscribe or commit to subscribe shares or units of the AIF”.
In other words, an activity is only considered as ‘marketing’ within the meaning of the AIFM Act if it entails the delivery of documents which may be used by potential investors for investing (or committing to invest) in the relevant AIF. Distribution to potential investors of material which may not be used to (or commit to) invest (eg term sheets, slide decks, draft PPM) does not constitute marketing.
This means that an AIFM (or one of its agents) may test the market and see whether there is appetite from Luxembourg professional investors before initiating the passporting or notification process required to allow the marketing of an AIF in Luxembourg.
During the pre-marketing phase (ie prior to accomplishing the relevant passporting or notification process), documents enabling potential investors to formally invest (or commit to invest) must not be delivered in Luxembourg.
AIFMs should be aware that undertaking pre-marketing does have consequences though. The revised FAQ confirms that if an AIFM presents at its initiative documents relating to the AIF to an investor, the AIFM will be prevented from claiming at a later stage that the relevant investor invested in the AIF in the context of ‘reverse solicitation’ (see section 2. below).
2. Reverse solicitation
The revised FAQ defines reverse solicitation as “providing information regarding an AIF and making units or shares of an AIF available for purchase to prospective investors following the initiative of that investor (or an agent of the investor) without any solicitation made by the AIF or its AIFM (or any intermediary on their behalf) [which would typically include a distributor or a placing agent] in relation to the relevant AIF”. If an investor subscribes at its own initiative without solicitation from the AIFM, there is no ‘marketing’ within the meaning of the AIFM Act and, therefore, no need to perform any of the passporting or notification processes.
An AIFM relying on reverse solicitation must be in a position to demonstrate that:
“the investor (or an agent of the investor) has approached the AIFM or the AIF on its own initiative with the intention of investing in (or, initially, receiving information regarding) AIF(s) managed by such AIFM; [and]
neither the AIFM nor the AIF (nor any intermediary acting on their behalf) has solicited the investor to invest in the relevant AIF”.
The revised FAQ confirms that an AIFM may provide evidence that an investment is made in the context of reverse solicitation by means of a written confirmation from the investor. AIFMs relying on reverse solicitation should, therefore, request that their investors confirm that they are investing at their own initiative.
Reverse solicitation may also occur when the investment is made at the initiative of an agent of the investor. Such an agent may, for instance, be a portfolio manager or an investment adviser. The revised FAQ confirms expressly that no marketing activity is deemed to have occurred within the meaning of the AIFM Act in a case where an investment in the AIF is made for the account of an investor:
by a portfolio manager in the context of a discretionary management mandate;
by an investment adviser in the context of an advisory management mandate; or
(where the investor is an AIF or an undertaking for collective investment (UCI)) by the entity in charge of the portfolio management of the AIF/UCI,
provided that such investment is made at the initiative of the relevant portfolio manager or investment adviser. Although this is not stated expressly in the revised FAQ, our understanding is that the AIFM should, in such circumstances, be in a position to provide evidence that the investment is made at the initiative of the relevant portfolio manager or investment adviser.
If the agent (portfolio manager or investment adviser) of the investor (i) is based in Luxembourg and (ii) does not invest (or recommend to invest) in the relevant AIF at its own initiative, subscription documentation can in principle only be delivered to the agent once the relevant passporting or notification process has been accomplished.
3. Territoriality and distance marketing
To come under the AIFM Act, marketing activities must take place within the territory of Luxembourg. However, certain marketing activities which are carried out at distance (ie without physical presence of the AIFM, the AIF or an agent in Luxembourg) may be deemed to be carried out within Luxembourg territory.
Distance marketing is defined in the revised FAQ as “any marketing activity which is carried out by any means of communication (eg, telephone or website) which does not imply the simultaneous presence in Luxembourg of (i) the AIF, the AIFM or their intermediary and (ii) the investor”.
The revised FAQ clarifies that distance marketing is considered as marketing in Luxembourg when (i) “the investors are domiciled or have their registered office in Luxembourg” and (ii) the relevant activity entails the distribution of “materials [that] can be used by the investor to formally subscribe or commit to subscribe for shares or units of the AIF”.
It is therefore our understanding that making information about AIFs available on a website that may be accessed by Luxembourg investors does not constitute ‘marketing’ within the meaning of the AIFM Act, unless documents available on the website include materials that can be used to formally (or commit to) subscribe for shares or units of the AIF. Depending on the circumstances, however, this could potentially constitute ‘pre-marketing’.
 Directive 2011/61/EU of the European Parliament and of the Council on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010.