It has now been a full year since US and other non-EU managers of private funds became subject to the Alternative Investment Fund Managers Directive when seeking to market or sell funds in countries in the European Union[1]. The landscape is still confusing, but there is greater clarity, and market practices and positions continue to emerge. This article provides a brief guide to current market practices and positions for the main issues that non-EU managers are facing.
Marketing – Reverse Solicitation
Reverse solicitation is a relatively new concept for many non-EU managers. The idea is that an investment is made at the investor’s initiative (rather than in response to a manager’s invitation, offering or solicitation), but the Directive does not provide any definition and it is left to each jurisdiction to provide guidance if it chooses. As certain jurisdictions have begun to act, we have seen a general market practice developing in this area:
Country-specific differences. General acceptability will often depend upon which country the marketing discussions are to take place in. Certain countries are generally more accommodating to reverse solicitation than others. For example, the formal guidance issued by the United Kingdom Financial Conduct Authority states:
“A direct confirmation from the investor that the offering or placement of units or 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.”
This means, generally, that provided that the reverse solicitation certification is not a ruse, it should be acceptable. At the other end of the spectrum, certain other countries, such as France, are generally known to be hostile to the idea of reverse solicitation and it is generally understood that in this market only a specific written request from an investor that specifically states the name of the new fund is likely to be sufficient.
The type of investors to be approached. Managers may be more willing to accept this type of reverse solicitation from institutional investors who are clearly able to make informed investment decisions rather than from individual investors. This is a practical risk management issue, though: there is no distinction drawn between different types of investors in the Directive.
The number of investors involved. It is generally more plausible that a manager would have been requested by a small number of investors to keep them informed about new funds than in the case of a large number of investors. Accordingly, many managers have limited reverse solicitations to no more than five or so per European jurisdiction.
Record keeping. Recording the investor’s initiative is clearly the crux of the matter. The argument that many managers (particularly with vintage year and other closed-end funds) make is that the investor has specifically requested the manager to keep it informed about new funds as they arise, but how reliable and up-to-date are the manager’s records? In these circumstances, managers should have on file either a specific request from an investor or, at least, a note of a meeting with the investor in the past where the investor specifically requests this. In other cases, web-based and other consulting services are seeking to facilitate diligence and inquiries from investors and may provide recordkeeping that helps support the case for reverse solicitation.
Timing. Does it matter if the investor specifically (and unprompted) requested details of new funds or strategies, but made this request perhaps several years ago? There is no time expiry in the Directive; everything is decided solely on the basis of at whose initiative was the investment made. It probably would be sensible, though, for managers orally to approach investors who made the request a long time ago to confirm that they still wish to be kept informed of new possibilities. This is not the manager’s requesting a reverse solicitation from the investor; it is the manager refreshing an existing request from the investor.
Marketing – Soft Marketing
Marketing is defined in the Directive as involving an “offer” of units or shares in a fund to prospective investors. So called “soft marketing” to investors with early stage documents cannot technically be an “offer” since there is nothing that can yet be legally accepted. There is a spread of regulatory views on this, but generally the following should be acceptable in most EU jurisdictions:
- Use general material such as pitch book, slide presentation, etc. Circulating draft PPMs and partnership agreements will be seen by some authorities as a little provocative.
- Restrict the number of people who receive this material and take back copies that are not absolutely necessary.
- Do not organize or incorporate the fund until the last moment.
- Refer to a “new fund” in generic terms rather than using a specific name such as “Alpha Partners VI, LP”.
Do remember that, although EU jurisdictions will generally permit this kind of soft marketing to appropriate institutional investors, it may make subsequent reverse solicitation claims difficult to sustain. Moreover, if the soft marketing is successful, the manager is likely to need to register before making an offer or sale, which can take time and entail substantial requirements, if it is available at all.
Registration
Article 42 of the Directive was intended to introduce a registration regime for each EU jurisdiction that would be broadly similar, but it has sadly not turned out this way. It is well know that registration in Germany, France and Denmark require the manager to appoint a depositary to the fund, but less well known are additional requirements imposed by, for example, the Dutch authorities, that require the manager to be regulated in its home country.
This is fine for managers registered with the SEC but for “venture capital fund” managers and other US exempt advisers and in countries such as Canada where registration is often not required, such managers will be excluded from registration. In addition, the BaFin in Germany has recently issued guidance that requires not only managers to be locally authorised but also for the funds to be registered in their home country. This will exclude a huge swathe of private funds from the German market.
There is still a wide variance in practice of other states. In the UK, for example, marketing may commence on registration but it seems that in other countries such as Sweden, the whole process can take months. We expect the registration requirements to continue to evolve on a state-by-state basis within the EU.
Registration: Sub-Threshold Managers
Unfortunately, it seems as though the UK is the only main EU state that has implemented a lighter sub-threshold regime for the registration of non-European managers marketing funds to European investors. Only in the UK is a non-European manager able to benefit from exemptions from many of the information disclosure requirements that apply to larger managers. The only obligations that will apply in the UK to such managers relate to providing the FCA with very limited information on the fund’s investment. The rules on disclosure to investors do not apply.
Conclusion
Given the different regimes adopted by different countries in the EU, finding a single marketing strategy for the EU can be a challenge, but managers are finding a way to obtain access to most of the potential European investors to whom they wish to offer new funds.
[1] All of Western and Central Europe with the exception of Switzerland. Switzerland, though, has introduced a regime of its own that is similar to the AIFMD in many ways.
