Since 2013, differences of opinion among EU member states have persisted as to what exactly constitutes ‘marketing’ of Alternative Investment Funds (AIFs) – as opposed to just testing investor appetite – under the Alternative Investment Fund Managers Directive (AIFMD). To address this, a new standardised EU concept of ‘pre-marketing’ comes into effect this summer, which fund sponsors should be getting ready for.
The current challenge with market soundings in the EU
Today, some EU states take the view that early-stage promotional activity intended to gauge possible investor appetite for a potential AIF is distinct from the AIFMD concept of ‘marketing’. They consider that ‘marketing’ amounts to the act of actually offering an AIF for subscription, usually characterised by the provision of final-form documentation, sufficient for an investor to make a decision and a binding commitment. Meanwhile, other states take a different and stricter view: they consider the definition of ‘marketing’ to be more expansive, encompassing both the actual sale stage as well as earlier promotions made to test the waters.
In states where market soundings are not considered ‘marketing’, the formal marketing registration/notification mechanisms in AIFMD are therefore not triggered. On the other hand, in states where market sounding is considered marketing, those mechanisms must be followed: this is usually expensive and time-consuming – just to test investor appetite – where a sponsor cannot use a marketing passport (non-EU fund managers or EU fund managers with a non-EU AIF).
The new concept of ‘pre-marketing’
The EU ‘Cross-border Distribution Directive’ (EU/2019/1160) (CBDD) applies the new concept of ‘pre-marketing’ to AIF managers and this definition will supplement the current definition of ‘marketing’ under AIFMD. The CBDD also specifies new procedures for carrying out pre-marketing, which fund managers/sponsors will need to be aware of and start following from 2 August.
The CBDD states ‘pre-marketing’ as meaning the provision of information or communication, direct or indirect, on investment strategies or investment ideas in order to test interest in an AIF (which does not yet exist, or does exist but has not yet been registered for marketing) and which does not amount to what is defined as actual marketing (offer or placement of an AIF).
It will be important for managers to differentiate their materials and activities between those which count as ‘pre-marketing’ and those which do not, because the communication of pre-marketing materials, while it does not trigger the full marketing mechanism under AIFMD, does require a notification to the applicable regulators and has other consequences (see below) under the CBDD.
Notification of pre-marketing activity
Within two weeks of beginning pre-marketing, managers need to notify the local regulator by letter (on paper or electronically) that they have done so, giving a brief description of their activity, including information on the investment strategies being presented and any specific AIFs to which the pre-marketing relates.
Managers must ensure that investors do not acquire units during or as a result only of the pre-marketing activity. This is because they would need first to comply with the next stage – the formal marketing requirements of AIFMD – by registering/notifying the fund and complying with any other requirements (e.g. disclosures).
When pre-marketing, fund managers will need to remember to check and adhere with any additional local rules on promotions in the relevant member state, as well as the pan-EU AIFMD rules.
Considerations for reverse solicitation
The CBDD also has relevance for ‘reverse solicitation’ (when an investor approaches a fund manager on its own initiative, not in response to a solicitation (pre-marketing or marketing activity) from the manager). It seeks to make a link in terms of time lapse, between the commencement of pre-marketing activities and when an investor makes an enquiry.
Any subscriptions for AIFs identified in pre-marketing, or AIFs established as a result of pre-marketing, will be deemed to be the result of the relevant pre-marketing activities for 18 months from the time the pre-marketing activity began. This means that, in that 18-month window, subscriptions could not be taken without having first registered/notified the fund according to the requirements in AIFMD.
Unfortunately, despite this effort on codification and standardisation on time periods, the CBDD is not totally clear as to which investors the 18-month restriction applies to: whether it means any investor in the EU, just in the member state concerned, or just those investors who were actually contacted in the pre-marketing. It seems there is support, in terms of the text and sentiment in the industry, for interpreting the meaning to be a reference to those who were contacted. The European Commission is due to report by August on reverse solicitation in the context of funds, which may be the precursor to more legislative formalisation on this topic.
Most managers will already keep accurate records of potential investors with whom contact has been made, and the CBDD further underscores the importance of doing so.
Application to UK and other non-EU managers
The CBDD does not expressly apply to non-EU managers of AIFs, although the expectation is that most member states will apply the new pre-marketing concept and rules in the same or similar way for non-EU managers. However, managers would be wise to confirm how the new rules apply to them in their target member states, rather than assuming they can just submit a notification letter as the CBDD describes.
Pre-marketing of AIFs previously registered for marketing
The CBDD also introduces a process for cancelling a full marketing registration/notification once it has been made. A link is made to pre-marketing in that, where a fund has been de-registered/de-notified, it cannot be ‘pre-marketed’ again (nor can a similar strategy or idea) for 3 years thereafter. To do so, a manager would have to go straight to the full marketing registration/notification process again.
Effect of the Directive in the UK
The Directive is not being given effect to in the UK, so the existing national private placement, financial promotion and (pre-Brexit) AIFMD-derived rules continue to apply.
If you are looking for advice on what is ‘pre-marketing’ or ‘marketing’ for AIFs, need help with registrations, or have questions on what is considered permissible reverse solicitation, please contact Simon Sutcliffe.
This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.