28. September 2018 Briefing

SMP Funds Briefing: 
Update on the harmonized "pre-marketing" definition: Council of the European Union and Parliament likely to promote a more liberal approach

Some time has passed since the EU Commission proposal on a harmonized "pre-marketing" definition in the AIFMD/ EuVECA regulation. This Briefing gives an update on some recent developments at the EU level.

Background: The EU Commission proposal to harmonize and narrow the "pre-marketing" concept

In our SMP Funds Briefing of 14 March 2018, we have addressed the EU Commission's proposal to amend both the directive regulating alternative investment fund managers (AIFMD) as well as the regulation for European venture capital fund managers (EuVECA) by – in particular – introducing a harmonized pre-marketing concept.

A fund manager needs to comply with the applicable regulatory regime if it is marketing a fund to potential investors, in particular a notification obligation. Pre-marketing, on the other hand, is a non-regulated activity of merely testing the water to assess investor appetite. Currently, the national authorities have different views as to when the line between pre-marketing and marketing activities is passed, i.e. the regulatory regime starts to apply, and often work with guidelines relying on practical examples of manager activities.

The proposed amendments would, going forward, exclude a broad range of activities from the pre-marketing definition, such as providing draft fund documents to potential investors. If excluded from pre-marketing such activities would trigger a formal notification obligation and require full regulatory compliance much earlier in the fundraising process, thus increasing the administrative burdens and cost risks for private equity and venture capital managers substantially.

Consequently, the Commission proposal has been subject to harsh criticism not only from fund managers and legal advisors but also from within the European Union's institutions. The European Economic and Social Committee voiced the strong concern that "the present proposal could lead to further fragmentation of the single market" and lacks "legal purity and consistency".

Recent developments

In its compromise proposal for an amendment the Council of the European Union, i.e. the EU Member State governments, has adopted a more liberal approach to a pre-marketing definition. While the compromise proposal still excludes the activity of providing information to investors, which enables said investors to commit to a fund, providing a "draft prospectus or offering documents" may very well still constitute pre-marketing, provided the documents

  • do not contain all relevant information allowing investors to take an investment decision and
  • clearly state that the documents do not constitute an official offer and are incomplete and subject to change.

This definition is still open to interpretation but is considerably less restrictive than the initial Commission proposal which excluded such draft documents from pre-marketing.

On 18 September 2018 the Rapporteur of the European Parliament's Committee on Economic and Monetary Affairs published his draft reports both on the proposed amendments to the AIFMD and the EuVECA regulation. Being very mindful of the industry's concerns, the draft reports contain an even more liberal approach to pre-marketing by removing the rather narrow definitions the Commission had proposed. Instead, the Rapporteur proposes "a more targeted approach" to avoid the bypassing of regulatory requirements by reverse solicitation. In the draft report he proposes that investors who have been approached via pre-marketing may in the following 18 months subscribe to the relevant fund only in regulated marketing. I.e. there is no room for "non-marketing", in particular reverse solicitation. In addition, pre-marketing activities should be documented and the documentation has to be provided to the competent authority upon request.

As the draft reports are only the very first step in an ongoing process, any assessments should only be made with great caution. However, it seems as if the concerns raised about the Commission's very restrictive proposal in March 2018 have been met with an open ear.

It is currently planned that a formalized agreement on the proposed amendments of the AIFMD/ EuVECA regulation shall be reached before the elections for the European Parliament in May 2019. This being said, there might be a number of changes during the forthcoming trilogue between the Commission, the Council and the Parliament. However, investors and fund managers can feel cautiously relieved that the narrow proposal by the Commission has come quite a long way since March. The discussions at EU level could also go in the direction of an alternative model to a formal notification procedure as a compromise (i.e. a mere information requirement about pre-marketing activities as some sort of light-touch notification). This does not seem wholly unlikely, since the draft reports already suggest documentation obligations. Fund managers and all persons involved in the field should stay tuned.

We will surely update you should any news arise.

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David John
Associate, Hamburg Office
Helder Schnittker
Partner, Berlin Office
Jens Kretzschmann
Partner, Berlin Office
Fabian Euhus
Associated Partner, Berlin Office
Julian Albrecht
Senior Associate, Hamburg Office
Lennart Lorenz
Senior Associate, Hamburg Office