The Alternative Investment Fund Managers Directive (AIFMD) introduced rules to regulate the pre-marketing of alternative investment funds (AIFs) on 2 August 2021. Managing Director – AIFM Services, Thomas Fahl and Business Development Director, Shaun Lee highlight the key changes and how AIF promoters can navigate the new landscape.
From 2 August 2021, the EU's Directive 2019/1160 and Regulation 2019/1156 (together the "Marketing Rules") took effect in a move to harmonise the cross-border marketing and distribution of alternative investment funds (AIFs) within the EU.
Notably, AIF promoters can no longer pre-market their fund, their investment strategies or investment ideas to get a sense of investor appetite without a notification to relevant regulators. This could present challenges for promoters seeking to access EU investors from outside of the EU. The key changes for AIF promoters are listed below.
Definition of pre-marketing
The Marketing Rules clearly define what pre-marketing means across all EU member states. Pre-marketing is defined as:
- provision of information on investment strategies or investment ideas by, or on behalf of, an EU AIFM;
- to prospective professional investors domiciled or with their registered office in the EU;
- to test investors' interest in an EU AIF which is not yet established, or not yet notified for marketing to the relevant EU member state regulator; and
- the provision of information must not amount to an offer or placement to the investor.
Impact for AIF promoters: EU member states have historically taken divergent stances on what constitutes marketing. The official definition should harmonise interpretations but it remains to be seen whether this will be realised across all member states.
Pre-marketing notification procedure
The Marketing Rules require AIF promoters to now notify member state regulators (e.g. if in Luxembourg, the Commission de Surveillance du Secteur Financier) of their pre-marketing activity within two weeks of beginning. The notification must be by way of a duly completed and signed pre-marketing notification letter to a dedicated e-mail address at the CSSF. Such letter must include at least:
- the member state(s) and the periods during which pre-marketing is taking or has taken place;
- a description of pre-marketing activities, including information on the investment strategies presented to investors; and
- a list of the AIFs or AIF sub-funds being pre-marketed.
Impact for AIF promoters: This introduces an additional administrative burden. Notably, non-EU promoters may be unfamiliar with this process and will need to prepare for this when planning their fund launch.
Pre-marketing can be conducted by, or on behalf of, an authorised EU AIFM. However, as part of the pre-marketing they cannot provide:
- information to potential professional investors that is sufficient to allow them to make an investment decision or commit to acquiring units or shares of an AIF; or
- information that amounts to subscription forms or similar documents (whether in a draft or a final form).
The above would instead constitute marketing under the existing rules.
Impact for AIF promoters: Fund promoters and GPs are no longer entitled to carry out pre-marketing activity spontaneously. In order to effectively pre-market their proposed AIF, they must appoint either an authorised EU AIFM such as Ocorian Fund Management, an authorised EU investment firm, an EU tied agent under the Markets in Financial Instruments Directive (MiFID), an EU-authorised credit institution, or an EU UCITS management company to carry out the notification formalities.
AIFMD did not previously restrict professional investors who wanted to invest in AIFs on their own initiative. The Marketing Rules change this. For 18 months after an AIFM has started pre-marketing, any new subscription from a professional investor will be deemed to have been the result of marketing and shall be subject to the already applicable AIFMD marketing notification procedure.
Impact for AIF promoters: Traditionally, non-EU AIF promoters have relied upon reverse solicitation to market their funds in the EU. The new rules mean reliance on reverse solicitation to market funds will not be possible anymore. Non-EU AIF promoters will need to engage with one of the regulated third-parties listed above to conduct their pre-marketing on their behalf, who then in turn need to keep track of the aforementioned 18-month deadline and actual subscriptions received by the AIF.
The Marketing Rules introduce new harmonised requirements applicable to AIFM marketing communications for AIFs. AIFM marketing communications should:
- be identifiable as marketing communications;
- present the risks and rewards of purchasing units of an AIF or a UCITS; and
- be fair, clear and not misleading.
Impact for AIF promoters: Naturally, many marketing presentations focus on the potential performance and rewards of an investment whilst risks are commonly found in the fine print. Fund promoters and managers will need to consider the Marketing Rules for all future marketing communications to ensure they apply a consistent approach.
Impact for non-EU AIFs
The Marketing Rules only apply to EU AIFMs managing EU AIFs. They do not apply to non-EU AIF promoters and non-EU AIFMs marketing funds under the EU member states' national private placement regimes (NPPRs). That being said, it is expected that AIF promoters and AIFMs marketing in the EU under NPPRs on or after 2 August 2021 will need to plan expecting that the Marketing Rules apply to their marketing activity.
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.