Do you want to target European investors for your next fund? If so, and you haven’t done so in the last couple of years, you may be surprised at the number of hurdles which need to be overcome. Here are 10 things you need to know about marketing your fund in Europe.
1. Since July 2013, a marketing “passport” has been available for funds and managers based in the EEA.
As a result of the Alternative Investment Fund Managers Directive (AIFMD), if a fund manager based in the EEA wishes to market a fund which is also based in the EEA, that manager can now apply to its local regulator for a “passport” to market that fund to professional investors throughout the EEA. Once the local regulator has confirmed that the offering documents of the fund are compliant with the requirements of the AIFMD, it will notify the regulators in each target Member State, and the fund manager can then market the fund to any professional investors in those Member States.
This has given EEA-based funds and fund managers a significant advantage when it comes to targeting European investors, although it is only available to managers with assets under management in all of their funds of more than €500m, or €100m if any of those funds are leveraged or have redemption rights exercisable during the first five years (or smaller managers who specifically opt-in to the AIFMD regime).
2. US managers will not be able to rely on this passport, and will need to comply with the national private placement regimes (NPPR) in each EEA Member State in which they want to market.
There are some requirements in the AIFMD regarding NPPR, which require that:
a. there is a co-operation agreement in place between the regulator in both the jurisdiction of the fund and of the fund manager, and in each Member State where it wishes to market its fund (such agreements are already in place between the SEC, the Cayman Islands, BVI, and Channel Islands and all of the main EEA jurisdictions);
b. neither the fund manager nor the fund are established in a country listed as non-cooperative by FATF (in practice this will be satisfied as the list of non-cooperative countries does not include anywhere a fund is likely to be established); and
c. the manager complies with certain parts of the AIFMD, i.e. the requirements relating to annual reporting to investors, disclosure to investors (before they invest in the fund), reporting to EU regulators and, if relevant, the obligations for managers managing funds which acquire control of non-listed companies and issuers (including asset stripping rules).
A limited number of jurisdictions (including the UK) operate a separate NPPR for smaller managers (i.e. below the thresholds noted in point 1 above) which does not require compliance with the above.
3. The NPPR are not otherwise harmonised, and differ in each Member State.
The NPPR really are diverse. The NPPR range from a fairly simple registration process through a formal approval from the local regulator (which in some cases can take a significant amount of time to obtain), to the imposition of additional requirements (so-called “gold plating”) as a condition to the grant of approval. Some Member States also charge a fee (one-off or on-going) for the grant of approval. In general terms, the markets which have always been fairly open (e.g. the UK, Ireland, Luxembourg) remain open, and the markets which have traditionally been restrictive (e.g. France, Italy) remain restrictive.
4. ESMA is consulting on extending the passport to certain third countries, including the US.
This consultation is on-going. If ESMA (the EU securities regulator) concludes that the passport should be extended to US-based managers/funds, it would give them access to the same passporting rights as EEA-based managers/funds. This sounds positive. However, it would mean full compliance with the requirements of the AIFMD as a pre-requisite to accessing that passport, including prescribed initial and on-going disclosures to both regulators and investors, a requirement to appoint a depositary to hold and oversee the fund’s assets, annual valuation, compliance with a remuneration code, and various other detailed conduct of business obligations. In conjunction with extending the passport it is possible that all rights to access the EEA through the existing NPPR would be abolished, although ideally the two would exist alongside each other.
5. Remember Switzerland is not in the EEA!
So Switzerland is not subject to the AIFMD. However, it also amended its rules relating to the distribution of funds in 2013, and as a result unless you are marketing only to prudentially supervised financial intermediaries (such as banks, insurance companies, asset managers or brokers) you will need to appoint a Swiss representative and Swiss paying agent before undertaking any marketing in Switzerland. Marketing to people other than “qualified investors” (e.g. some family offices) will require an additional registration.
6. When does marketing start?
There is no EEA-wide harmonisation regarding when “marketing” of a fund starts, i.e. the stage in the overall marketing process at which the passport or NPPR registration/approval must be made. In the UK, the regulator (the Financial Conduct Authority (FCA)) has issued guidance which can be interpreted as meaning marketing will only occur for these purposes when final offering documents and an application form are circulated. So draft documents may be circulated and investor negotiations undertaken before the fund is registered with the FCA under the NPPR, although such activities will still need to comply with the general rules in the UK relating to the financial promotion of any investment. Other Member States adopt a stricter interpretation, and may require registration or approval before any fund-specific marketing can be undertaken.
7. You may be able to use the services of a third party AIFM or platform within the EEA which already has access to the passport.
Various firms have set themselves up to provide the service of acting as the EEA-based AIFM of a fund which is sponsored and advised by an entity outside the EEA. These take the form of platforms (where individual sub-funds with different sponsors/advisers can be added into an existing umbrella fund structure) or segregated funds (i.e. the third party acts as the manager of a new limited partnership or other structure).
8. You may be able to avoid some of these hurdles by relying on “reverse solicitation”.
The rules in AIFMD are based on marketing a fund “at the initiative of” the fund manager or on its behalf. This means that if the fund manager is approached by a potential investor, this may fall outside all of the above rules. However, there is no definition of, or guidance given at a European level regarding, the scope of this. What is clear is that the approach must genuinely come at the investor’s own initiative, and if relying on this fund managers are advised to keep all records (e.g. emails) evidencing this approach. Beyond that, you would be well advised to seek individual guidance from counsel in each relevant Member State before relying on this.
9. The AIFMD passport and many of the NPPR only cover professional investors.
“Professional investor” is defined by reference to the Markets in Financial Instruments Directive (MiFID), and is therefore harmonised throughout the EEA. It is important to note that an individual (however high his net worth) will only constitute a professional investor if he has been classified as such by a MiFID investment firm and subject to specific tests. The same will be true of local government pension schemes once MiFID II comes into force in 2018. Some Member States have a separate regime for marketing to individuals.
10. Osborne Clarke LLP can help.
Our funds team in the UK, working with our offices and partners throughout Europe, can help you navigate these rules.