In this article, first published by Hedge Fund Insight, Vanessa Molloy and Chiara Deceglie discuss pre-marketing and reverse solicitation of hedge funds.
Last month, the European Parliament adopted the final text of the Directive amending (amongst others) the Alternative Investment Fund Managers Directive (the Amending Directive). This European Union law applies to the financial regulation of hedge funds, private equity funds and other alternative investment funds in the EU.
The stated objective of the Amending Directive is to establish uniform rules on the publication of national provisions concerning marketing requirements for collective investment undertakings in relation to their cross-border activities. The Amending Directive is required to be transposed into national law within two years of the entry into force of the Directive. Full implementation can therefore be expected to occur sometime in the summer of 2021.
Pre-marketing and reverse solicitation
Previously, fund promoters embarking on a marketing roadshow, armed with an outline of the features of a potential alternative investment fund (AIF), would test the interest of prospective investors for certain strategies before proceeding with the establishment of the AIF. However, the definition of pre-marketing and the conditions under which it is permitted vary considerably within the EU. In certain Member States there is no concept of pre-marketing at all.
In Luxembourg, (amongst other jurisdictions – notably the UK) the presentation of draft offering documents in relation to an EU AIF by an authorised EU AIFM to prospective EU Professional Investors does not currently constitute marketing, provided no binding subscription can be made.
Following a roadshow, if an authorised EU AIFM responds to unsolicited enquiries from potential EU Professional Investors and follows up with offering documents, subscription forms, etc. (so-called “reverse solicitation” or “passive marketing”), this usually does not trigger the marketing notification obligation under the AIFMD. This approach is common amongst smaller managers, building their assets under management and launching their first funds.
To address these divergences, the Amending Directive introduces a harmonised definition of “pre-marketing”:
“pre-marketing” means 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 [the AIFMD] 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 to invest in the units or shares of that AIF or compartment.
Under this new definition, any subscription of shares or units in an EU AIF by EU Professional Investors within 18 months of the authorised EU AIFM commencing pre-marketing will be deemed to be “marketing” under the AIFMD and subject to the marketing notification obligations. If, further to pre-marketing, the subscription occurs after the 18-month period, then the marketing notification procedures under the AIFMD are not applicable.
Although the pre-marketing definition adopted is not as narrow as the original definition proposed by the European Commission, it still fails to acknowledge that in practice many AIFs are highly tailored and negotiated investment vehicles and that pre-marketing rules may not be necessary in some of these cases.
Seemingly, the amending directive does not remove reverse solicitation in its pure form – where a professional investor accesses an AIF purely at his own initiative provided the local rules permit it.
Pre-marketing notification requirements
The Amending Directive requires an authorised EU AIFM to send, within two weeks of commencing pre-marketing, an informal letter to its regulator setting out, (amongst other matters), the Member States in which it has engaged in pre-marketing, the periods during which it occurred or continues to occur and, if relevant, a list of the AIFs and compartments subject to pre-marketing.
What does this mean for promoters?
The Amending Directive will only affect a promoter that is an authorised EU AIFM with an EU AIF, pre-marketing to EU Professional Investors.
For a non-EU AIFM, with an EU or non-EU AIF, and for an authorised EU AIFM with a non-EU AIF, the Amending Directive:
- will not affect the existing marketing position in respect of EU/EEA retail investors. The rules of the EU Member State where the investor is domiciled will prevail and apply to pre-marketing and reverse solicitation.
- will not affect the existing marketing position in respect of EU/EEA Professional Investors, where the national private placement regime will continue to apply.
- will seemingly not affect a promoter that is not an authorised EU AIFM that has not yet identified an authorised EU AIFM (to be used as a third-party management company solution) because only a third party engaged in pre-marketing on behalf of an authorised EU AIFM will be impacted.
If you have any questions, please contact Vanessa Molloy, Chiara Deceglie or your usual Harneys contact.