Can I use an exhibition space at a conference in France and organise a cocktail for potential investors without registering my investment fund with the AMF? Can I accept a subscription request from a British investor although I do not market my fund in United Kingdom (UK)? These are typical concerns asset managers have about which marketing activities are permitted and which are not. The answer is rarely simple. The competent authorities of some countries have, however, provided some guidance.
What’s the problem?
The UCITS Directive offers a cross-border marketing passport. UCITS may automatically be marketed in their home Member State. The passport permits the marketing of a UCITS in another European Union (EU) or European Economic Area (EEA) Member State to professional and non-professional (retail) providing that certain requirements are met.
The AIFM Directive offers a passport to AIFMs to market the AIF they manage to professional investors in any Member State providing that certain requirements are met. Under the AIFM Directive, each Member State may lay down its own specific requirements regarding the marketing of AIF to retail investors. In theory, it is simple, but it is much more complex in practice.
Before you market your fund to professional or nonprofessional investors on a cross-border basis with a passport, your fund needs to be registered with the competent authority of the Member State where you intend to market the fund (the host Member State). The fund is registered via the simplified home-to-host Member State notification procedure.
In addition the UCITS or its management company, or the AIF or its AIFM must, inter alia:
- Ensure that local facilities are available in the host Member State
- Ensure that information is provided to investors in each Member State in accordance with the UCITS or AIFM Directive and local requirements
- In the case of UCITS, ensure that fund documents are published for investors in each Member State
- Maintain the registration up-to-date
- Comply with specific local requirements, such as those on marketing materials, regulatory reporting, tax reporting, etc
In the case of marketing of AIF to retail investors, each Member State has laid down its own detailed rules.
Because these requirements are so challenging and costly to comply with, management companies and AIFMs are looking for clarity regarding the activities which are:
- In the scope of marketing, requiring registration and full compliance with all these requirements
- Outside the scope of marketing and therefore are only subject to general rules
What is marketing?
The UCITS Directive does not define marketing but the AIFM Directive does include a definition. Marketing under the AIFM Directive means a direct or indirect offering or placement at the initiative of the AIFM or on behalf of the AIFM of units of an AIF it manages to or with investors domiciled or with a registered office in the EU or EEA. The AIFM Directive also clarifies that a professional investor established in the EU or EEA may invest in AIFs on its own initiative, irrespective of where the AIFM and/or the AIF is established. Such activity is generally referred to as reverse solicitation or passive marketing.
The problem for asset managers is that there is insufficient detail in the text; both are open to interpretation and no mandate has been given to the European Commission or the European Securities and Markets Authority to define marketing. Each Member State’s competent authorities and courts may therefore interpret these provisions in a different manner – at least until a harmonised approach is adopted at EU level. Certain Member States have now provided clarifications regarding the scope of marketing activities and activities which are considered to be outside the scope of marketing activities.
We would like to take the example of three key jurisdictions: France, Luxembourg and the UK.
France
According to the AMF guidance, the act of marketing of units of UCITS or AIF consists in offering the UCITS or AIF in the territory of France through any channel (advertising, canvassing, advice…) with a view to inducing an investor to subscribe or purchase units. The AMF has clarified that the units of a UCITS or AIF are considered to have been marketed in France for as long as the investors are unitholders of the UCITS or AIF.
Luxembourg
According to the CSSF, “marketing” takes place when the AIF, the AIFM or an intermediary on their behalf seeks to raise capital by actively making units of an AIF available for firm purchase by a potential investor. Thus, marketing takes place when the relevant material provided to investors can be used to formally subscribe or commit to subscribe to shares or units of the AIF.
UK
In the view of the FCA, an offering or placement takes place when a person seeks to raise capital by making a unit of share of an AIF available for purchase by a potential investor. This includes situations which constitute a contractual offer that can be accepted by a potential investor in order to make the investment and form a binding contract, and situations which constitute an invitation to the investor to make an offer to subscribe for the investment.
Pre-marketing
All three competent authorities have issued clarifications regarding the pre-marketing phase during which draft documents may be presented to investors but investors cannot subscribe or make capital commitments.
France
According to the AMF, the practice of contacting up to a maximum of 50 investors in order to gauge investor appetite for a UCITS or AIF before launch is not considered to fall within the scope of marketing provided that such pre-marketing is:
- Limited to professional investors and individuals whose initial subscription would be at least EUR 100,000
- Not accompanied by the provision of a subscription form and / or delivery of documentation with definitive information on characteristics of the funds that would enable these investors to subscribe or commit to subscribe for units of the UCITS or the AIF
Any subsequent subscription by such investors is considered to be within the scope of marketing; it cannot be considered to be within the scope of reverse solicitation.
Luxembourg
The presentation of draft documents in relation to an AIF by an AIFM to prospective investors does not constitute a marketing activity provided that the draft documents cannot be used by the prospective investors to formally subscribe or commit to subscribe shares or units of the AIF.
UK
Any communications relating to draft documentation do not, in the view of the FCA, fall within the meaning of an ‘offer’ or ‘placement’ for the purposes of AIFMD. For example, a promotional presentation or a pathfinder version of the private placement memorandum would not constitute an offer or placement, provided such documents cannot be used by a potential investor to make a subscription.
However, a unit of the AIF should not be made available for purchase as part of the capital raising of the AIF on the basis of draft documentation in order to circumvent the marketing restriction. However, when communicating with potential investors in relation to draft documentation, consideration needs to be given to whether such a communication is a financial promotion; financial promotions are subject to a different set of rules.
Reverse solicitation
All three competent authorities have issued clarifications regarding reverse solicitation.
France
According to the AMF, transactions in units of UCITS or AIF at the sole initiative of an investor are considered to fall outside the scope of marketing where:
- The UCITS or AIF has been specifically designated by the investor
- The investor is permitted to invest in the UCITS or AIF
- The investor has not been solicited
Luxembourg
According to the CSSF, “reverse solicitation” consists in providing information regarding an AIF and making units of that AIF available for purchase to a potential investor following an initiative of that investor (or an agent of that investor) without any solicitation made by the AIF or its AIFM (or an intermediary acting on their behalf) in relation to the relevant AIF.
Reverse solicitation is not considered as marketing within the meaning of the AIFMD provided that both of the following conditions are met:
- The investor (or an agent of the investor) has approached the AIFM or the AIF on its own initiative with the intention of investing in (or, initially, receiving information regarding) the AIF(s) managed by such AIFM
- Neither the AIFM, nor the AIF (nor any intermediary acting on their behalf) has solicited the investor to invest in the relevant AIF
The AIFM bears the burden of proof as regards the investor’s initiative to invest in an AIF managed by the AIFM; this may include a written statement by the investor. The CSSF highlights that the concept of “reverse solicitation” cannot be invoked to circumvent the requirements of the AIFM Directive.
UK
According to the FCA, a confirmation from the investor that the offering or placement of units of shares of the AIF was made at its initiative, should normally be sufficient to demonstrate that this is the case, provided this is obtained before the offer or placement takes place. However, AIFMs and investment firms should not be able to rely upon such confirmation if this has been obtained to circumvent the requirements of AIFMD.
Participation in conferences and events
The AMF has recently issued additional guidance regarding participation in conferences and events.
France
A management company or an AIFM which participate in conferences or organise meetings for investors in order to inform them about market developments and trends and the activities of the management company or AIFM, is not considered to fall within the scope of marketing units of UCITS or AIF where:
- Such conferences or events are reserved for professional investors
- There is no solicitation to invest in any specific UCITS or AIF
- There is no communication regarding UCITS or AIF which are open for subscription
The management company or AIFM’s communications regarding its activities at such conferences and events may include information on:
- Management team
- Investment strategies
- Funds which are not open for subscription
- Any other general communication
Other activities outside marketing
There are a number of other topics on which the one or more competent authorities have issued guidance on the scope of marketing, such as:
- Managed account transactions (discretionary portfolio management)
- Investment by another investment fund (collective portfolio management)
- Listing of an AIF
- Over the counter (OTC) secondary market transactions in units of UCITS or AIF
- Transactions in the framework of the remuneration of professionals of the management company or AIFM and transactions on their behalf
- Responses to requests for proposal (RFPs)
- Conclusion
When engaging with potential investors before registration and complying with all the applicable lcoal requirements, asset managers face uncertainty regarding interpretation of the definition of marketing and the inherent legal and regulatory risk.
However the guidance issued by the competent authorities of certain Member States provides a number of helpful indications.