In March 2018, the European Commission proposed a regulation on facilitating cross-border distribution of collective investment funds and a complementing directive amending the Alternative Investment Funds Managers Directive (2011/61/EU) (AIFMD). The European Commission has introduced a new definition of ‘pre-marketing’ under the proposed directive, which would restrict permitted pre-marketing to professional investors only. This approach is at odds with the current practice and the regulatory approach in the UK. Considering that the proposed directive will not be implemented before Brexit in March 2019, there may be divergence between UK funds law and AIFMD in the future.
Marketing communications under AIFMD
AIFMD requires an Alternative Investment Fund Manager (AIFM) to submit a notification to the competent authority of its home member state of each EU Alternative Investment Fund (AIF) it intends to market. In practice, this means that all communications, including offer documents, private placement memoranda, roadshow presentations, marketing materials such slide decks and any planned communications by the AIFM will need to be approved by the competent authority before the AIFM may market the AIFs it manages. However, as currently drafted, AIFMD and its Level 2 regulations do not provide adequate guidance on what communications fall short of ‘marketing’. Thus, different member states adopt divergent approaches in this respect.
AIFMs wishing to test investor appetite for a particular investment idea or investment strategy frequently engage in ‘pre-marketing’ communications. There is no consistent approach across member states; some do not recognise the concept of ‘pre-marketing’ at all, while those who do adopt divergent definitions and impose different conditions. This adds complexity and regulatory costs thus creating disincentives for the cross-border marketing of AIFs. Indeed, according to the findings of the Commission, the AIF market remains predominately national, with only 3% of AIFs registered for distribution in more than three member states.
The Commission’s proposals
The Commission’s proposals aim to promote the cross-border distribution and marketing of AIFs in the EU by reducing the regulatory barriers imposed by member states’ divergent marketing requirements. They seek to address the market fragmentation and form part of the package of measures to deepen the Capital Markets Union (CMU).
In light of the above, the Commission addresses inconsistencies and defines ‘pre-marketing’ as “a direct or indirect provision of information on investment strategies or investment ideas by an alternative investment fund manager (AIFM) or on its behalf to professional investors domiciled or registered in the Union in order to test their interest in an alternative investment fund (AIF) which is not yet established”. In this case pre-marketing is permitted without regulatory notification and approval, unless information presented to professional investors:
“(a ) relates to an established AIF;
(b) contains reference to an established AIF;
(c) enables investors to commit to acquiring units or shares of a particular AIF;
(d) amounts to a prospectus, constitutional documents of a not-yet-established AIF, offering documents, subscription forms or similar documents whether in a draft or a final form allowing investors to take an investment decision.”
Moreover, according to the recitals of the proposed directive, “when following the pre-marketing the AIFM offers for subscription units or shares of an AIF with features akin to the pre-marketed investment idea, the appropriate marketing notification procedure should be observed and the AIFM should not be able to invoke reverse solicitation”.
The UK position
In the UK, the Financial Conduct Authority (FCA) has taken the position that the documentation should be in “materially final form” before an AIFM is required to provide it for approval as marketing under AIFMD. Therefore, providing potential investors draft or incomplete offer documents and communications associated with them fall under permitted ‘pre-marketing’, given that the AIFM cannot apply for permission to market the AIF at this point.
Such pre-marketing is often the precursor to an application for ‘reverse solicitation’. Marketing approvals do not apply where an offering or placement of units or shares of an AIF to an investor is made at the initiative of that investor. Such reverse solicitation is commonly used in the funds industry, particularly with non-EU AIFMs, mostly where the investor is a professional investor. In practice, an AIFM may approach interested potential investors in the pre-marketing period with draft offer documents. Those investors may subsequently, at their own initiative, approach the AIFM to invest in the AIFs. Then the AIFM may provide these investors with the offer documents and enable their investment in the AIF(s) without having to comply with the usual marketing approval requirements.
What is next for AIFMs?
The availability of providing draft documentation during a pre-marketing period and relying on reverse solicitation may be drawing to an end, at least in the EU. Some industry bodies have come out against the Commission’s proposed approach, warning these new rules on pre-marketing will add complexity and restrictions on asset managers looking to sell to EU investors. The Commission’s approach is viewed as too restrictive and might prove particularly problematic, considering that AIF documentation is typically open for negotiation until a late point in time. It also reflects the Commission’s attempt to create a ‘level playing field’ between AIFs and undertakings for collective investment in transferable securities (UCITS), notwithstanding the different nature of these investments and investor profile.
If these changes to AIFMD are adopted by mid-2019, as expected, they will have to be implemented by member states by 2021. In the meantime, the UK is expected to exit the EU in March 2019, possibly with a transitional arrangement ending in December 2020. Considering the divergent views in the field of pre-marketing and reverse solicitation, this timing raises questions as to the position the UK will choose to adopt. It is expected that the UK will seek to ensure that its laws are substantially equivalent with funds law of the EU for third country regime purposes.
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