Last year's implementation of the EU's Alternative Investment Fund Managers Directive (AIFMD) introduced an entirely new regulatory framework in Europe. Fortunately for Asia-based managers of offshore funds the good news was, and still is, that it's mostly 'business as usual'. However, that is not to say that these managers can simply turn a blind eye to this new regime.
WHO IS AFFECTED?
It is important to remember that the AIFMD applies to non-EU alternative investment fund managers (AIFMs) who are:
1. managing an alternative investment fund (AIF), which means a non-UCITS fund (whether EU or non-EU); and
2. marketing to EU investors.
It is this controversial second point that will be crucial for Asia-based AIFMs. If marketing to EU investors, they will need to comply with the AIFMD - and the requirements for this will become progressively more demanding leading up to 2018.
WHAT IS "MARKETING TO EU INVESTORS"?
This is an important question for Asiabased managers of offshore funds - but, unfortunately, there's no easy answer!
Whilst the AIFMD includes a definition of "marketing"1, Member States have interpreted and applied this differently. For example:
- Belgium, France and Italy have adopted very wide definitions of "marketing" that cover any contact with a potential investor initiated by the AIFM.
- The UK and Germany allow some activities - such as the circulation of draft fund documents - to fall outside the definition of "marketing".
- Denmark allows initial meetings with potential investors before the fund is formed and a PPM exists, provided it's not possible for the investor to commit at that time.
The AIFMD does not restrict "reverse solicitation", and some institutional investors have prepared their own form of reverse solicitation letter for this purpose. However, the application of this concept is potentially very narrow. It should be used with caution and in limited circumstances.
Therefore, whether an AIFM is "marketing to EU investors" may not always be immediately clear. It will depend on the location of those investors2 and intended marketing activities.
HOW CAN A NON-EU AIFM MARKET OFFSHORE FUNDS TO EU INVESTORS?
1. Private Placement
Until at least 2018, this may, subject to certain criteria, continue to be achieved via each country's national private placement regime. However, where an AIF is marketed in the EU, the AIFM must comply with some (or possibly all) requirements of the AIFMD, including those relating to (i) annual reports; (ii) investor disclosure (in relation to EU investors); (iii) regulatory reporting; and (iv) if relevant, reporting on substantial stakes in EU companies.
From September 20153, a non-EU AIFM may, subject to certain criteria, become authorised under the AIFMD to market its AIFs in Member States. This subjects the AIFM to full AIFMD requirements, but allows for marketing of AIFs to investors across the EU via the "passport" mechanism.
Whilst a passport avoids the need to be separately authorised in each Member State, it does not give an AIFM unimpeded access across the EU. An AIFM must notify its EU 'regulator of reference' of its marketing intentions and will remain subject to the laws and supervision of the target Member State(s). These will vary from country-tocountry, so there will still be a need to seek advice in each targeted Member State before marketing there.
WHAT ARE THE REQUIREMENTS TO USE THIS PASSPORT?
Once the passport is available, and amongst other requirements, the jurisdictions where the AIFM and the AIF are established must both:
- have an information exchange agreement (including tax) in place with the relevant Member State(s); and
- not be on the Financial Action Task Force's list of Non-Cooperative Countries and Territories.
The Channel Islands and Cayman Islands have already signed information exchange agreements with most EU Member States4 and are not on the FATF's list of NCCTs. The Channel Islands have also implemented opt-in regimes alongside their existing funds regimes that allow full compliance with the AIFMD where preferred (e.g. to benefit from the passport).
SO... WHAT NOW?
If you're a fund manager in Asia who is marketing an offshore fund to EU investors, you should:
1. Ensure you are in compliance with the relevant private placement regimes and applicable requirements of the AIFMD;
2. Review and respond to ESMA's consultation on the AIFMD passport for non-EU AIFMs5, which is open from 7 November 2014 until 8 January 2015; And
3. Consider whether, once available, it may be beneficial to become authorised under the AIFMD for passport purposes and, if so, begin steps to ensure a smooth application process late next year.
We would expect the majority of our clients to continue using the private placement route whilst this remains open. However, please feel free to contact us if you would like to discuss your options.
1 "A direct or indirect offering or placement at the initiative of the AIFM or on behalf of the AIFM of units or shares in an AIF it manages to or with investors domiciled or with a registered office in the Union."
2 Notably, the AIFMD only provides a framework for marketing to 'professional investors', not 'retail investors'.
3 The availability and timing of the passport for non-EU countries remains subject to the European Securities and Markets Authority (ESMA) recommending that the passport be extended to such countries (due in July 2015) and the European Commission introducing that extension (due in September 2015)
4 Guernsey (27), Jersey (27), Cayman (27). For an up-to-date summary of signed agreements, see ESMA's website: http://www.esma.europa.eu
5 The consultation paper can be accessed at http://www.esma.europa.eu/system/files/2014-esma-1340_call_for_evidence_aifmd_passport__3rd_country_aifms.pdf and contributions should be submitted online at www.esma.europa.eu under the heading Your input -Consultations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.