The European Union’s new cross-border fund distribution laws comes into impact August 2, 2021, updating the prevailing framework for advertising and marketing various funding funds (AIFs) within the European Union (EU). The modifications goal to additional harmonise the foundations regarding advertising and marketing funds and to enhance investor safety. While harmonisation, notably the introduction of an EU-wide definition of “pre-marketing,” will likely be welcomed by AIF managers (AIFMs) based mostly within the EU, the brand new guidelines current some new challenges for fund sponsors in search of to entry EU buyers.
Cross-Border Distribution Legislation
On June 20, 2019, the EU legislator adopted two items of laws: (1) Directive (EU) 2019/1160 (CBDD), which amended earlier directives overlaying cross-border distribution of collective funding undertakings; and (2) Regulation (EU) 2019/1156 (CBDR) on facilitating cross-border distribution of collective funding undertakings. The CBDD took impact August 1, 2019, and was to be transposed into the nationwide legal guidelines of the EU member states by August 2, 2021. It is feasible, nevertheless, that sure member states won’t have adopted their implementing laws by the deadline. The CBDR is straight relevant within the EU, without having for implementing laws, and its key provisions on advertising and marketing communications may even develop into efficient August 2, 2021.
One of the important thing components of the CBDD is the introduction of a definition of “pre-marketing” within the context of the EU’s Alternative Investment Fund Managers Directive (AIFMD).1 The AIFMD extends to any advertising and marketing of an AIF within the EU, and below its advertising and marketing guidelines the AIFM should have a advertising and marketing passport, within the case of EU AIFMs, or have registered the AIF below the personal placement regime of every member state the place the AIF is to be marketed. However, member states have differed in what actions they contemplate “advertising and marketing” and what paperwork might be supplied to potential buyers with out triggering registration necessities. As a outcome, each EU and non-EU AIFMs have needed to adjust to the differing guidelines of every jurisdiction wherein they want to market their fund. A transparent and harmonised definition of pre-marketing is subsequently a welcome enchancment that ought to simplify fundraising plans.
The CBDD defines “pre-marketing” as:
provision of info or communication on funding methods or funding concepts;
by an AIFM authorised within the EU or its delegate performing pre-marketing actions on its behalf;
to potential skilled buyers domiciled or with their registered workplace within the EU;
to check their curiosity in an EU AIF which isn’t but established or not but notified for advertising and marketing below the AIFMD advertising and marketing passport within the EU member state of the potential investor.
At its core, the EU’s definition of pre-marketing is similar to that adopted by the U.Ok. Financial Conduct Authority and will allow AIFMs to supply fund documentation to potential buyers within the EU with out having to register for advertising and marketing below the AIFMD, supplied that the documentation can’t be used to subscribe or decide to the related AIF. In observe, this may imply that AIFMs can present supplies akin to advertising and marketing decks and time period sheets so as to gauge demand earlier than pursuing a full advertising and marketing registration. Consistent with present observe, AIFMs might want to register for advertising and marketing so as to present subscription types, or remaining constitutional or providing paperwork.
As drafted, the CBDD solely applies to authorised EU AIFMs, leaving the door open for particular person EU member states to find out whether or not equal guidelines ought to apply to non-EU AIFMs. In Germany for instance, the regulator has confirmed that AIFMs based mostly outdoors the EU will likely be required to submit a pre-marketing notification in a fashion much like EU AIFMs (though, in contrast to EU AIFMs, there isn’t a choice to “passport” the notification and it’ll must be accomplished on a jurisdiction-by-jurisdiction foundation). Similarly, it’s unclear how the foundations ought to apply to new managers who might need to conduct some market-testing earlier than getting absolutely authorised as an AIFM.
The CBDD additionally units out necessities relating to pre-marketing by third-party intermediaries akin to placement brokers, requiring them to be authorised within the EU below one of a quantity of regulatory regimes (i.e., as a credit score establishment, an funding agency below the Directive on Markets in Financial Instruments (MiFID), a administration firm below the Undertakings for Collective Investment in Transferable Securities Directive or an AIFM), or to be a MiFID tied agent. However, neither pre-marketing nor advertising and marketing actions fall clearly inside any of the outlined actions regulated below MiFID or different European rules, so this requirement was one thing of a shock. It additionally presents a brand new problem for the third-party AIFM mannequin. Many non-EU managers have sought to make use of a third-party AIFM so as to adjust to AIFMD. The introduction of this new requirement would imply that non-EU managers that depend on third-party AIFMs could also be unable to hold out pre-marketing actions with out further preparations akin to a secondment association (the place fundraising personnel from the non-EU supervisor are seconded to the EU third-party AIFM so as to perform advertising and marketing actions).
Under the CBDD, authorised EU AIFMs are required to submit a notification to their residence state regulator inside two weeks of the launch of pre-marketing by means of an off-the-cuff letter in paper or digital type. The letter should include at the very least the next info:
the EU member state(s) wherein pre-marketing is taking or has taken place, and the related time intervals;
a short description of the pre-marketing engaged in, together with info on the funding methods introduced to buyers in that context; and
the place related, an inventory of the AIFs (or AIF subfunds) which might be or have been the topic of pre-marketing.
Once an AIFM has submitted a pre-marketing notification, any subscription for pursuits in an AIF by an EU investor inside 18 months of graduation of pre-marketing will likely be deemed to be the outcome of advertising and marketing by the related AIFM (i.e., it won’t be handled as occurring on the investor’s personal initiative) and can set off the appliance of the AIFMD advertising and marketing notification procedures. In different phrases, commencing pre-marketing will forestall reliance by the AIFM on reverse solicitation for 18 months.
A key component of the CBDR is the introduction of harmonised guidelines on advertising and marketing communications by (amongst others) EU AIFMs to buyers within the EU. The European Securities and Markets Authority (ESMA) issued tips earlier this yr on advertising and marketing communications below the CBDR (Guidelines). These will develop into relevant six months after the date of their publication in all EU official languages. It is at present unclear when the publication course of will likely be full.
The CBDR and the Guidelines set out two core ideas for advertising and marketing communications: (1) Marketing communications to buyers, whether or not retail or skilled, should be identifiable as such and describe the dangers and rewards of investing within the AIF in an equally outstanding method; and (2) all info included in advertising and marketing communications should be truthful, clear and never deceptive, and — as additional specified by the Guidelines — appropriate to the goal buyers. The suitability situation might require AIFMs to adapt supplies relying on whether or not the fund is open to retail buyers or solely to skilled buyers.
Neither the CBDR nor the Guidelines outline a “advertising and marketing communication” for these functions. Instead, the Guidelines present: (1) illustrative examples of paperwork which may be thought of as advertising and marketing communications (e.g., press articles, interviews, ads, internet pages, video or dwell shows or factsheets meant to promote an AIF, in addition to messages on social media platforms); and (2) an inventory of communications that shouldn’t be thought of as advertising and marketing communications (e.g., authorized and regulatory paperwork of the AIF, company communications, brief on-line messages solely together with a hyperlink to an online web page the place a advertising and marketing communication is offered and communications issued throughout pre-marketing). Perhaps surprisingly, these obligations will apply to communications, akin to a fund advertising and marketing presentation, made throughout advertising and marketing, but not throughout pre-marketing. Nevertheless, fund managers and sponsors will need to contemplate the CBDR and the Guidelines for all advertising and marketing communications to make sure a consistency of strategy.
The CBDD and CBDR convey some welcome clarification to the advertising and marketing processes for EU fund managers. However, as is commonly the case when attempting to design guidelines for the extensive spectrum of constructions and individuals in personal funds, there stay a quantity of concerns to be reviewed by fund sponsors wishing to entry EU buyers. There look like indicators that the harmonisation and implementation by EU member states will make the foundations clearer for each EU and non-EU fund managers, but some constructions and advertising and marketing methods would require continued evaluation as the foundations come into drive throughout the EU.
1 Directive 2011/61/EU of 8 June 2011 on Alternative Investment Fund Managers.