Some time has passed since the European Commission proposal on a harmonized "pre-marketing" concept was published on 12 March 2018. This SMP Fund Briefing provides an update on the compromise now reached by the EU trialogue parties.
I. Status quo: a fine line between marketing and pre-marketing
On the one hand, a fund manager needs to comply with the applicable regulatory regime if it is marketing its fund to potential investors. Within the EU this includes at least a registration with the home state regulator and in most cases a notification to the regulator in the host state if it is marketing abroad. Pre-marketing, on the other hand, is generally regarded as 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 and often work with guidelines relying on practical examples of manager activities.
In March 2018, the European Commission set out to remove such different national views on pre-marketing by amending, among others, the AIFM directive and the EuVECA regulation and thereby creating a level-playing-field within the EU. The proposal (consisting of an amending directive and regulation, respectively) was also understood to be aimed at curbing reverse solicitation in particular by third-country managers, including post-Brexit UK managers. The European Commission's proposal received harsh criticism not only from fund managers and legal advisors but also from within the European Union's institutions. (SMP Funds Briefing: EU Commission proposal: narrowing the "pre-marketing" concept)
In the following negotiations between the EU co-legislators (the so-called trialogue, consisting of the EU Council, the European Parliament and the European Commission) the draft was significantly altered. The EU Council introduced substantially more room for negotiation of key terms before crossing the line into marketing (SMP Funds Briefing: Update on the harmonized "pre-marketing" definition: Council of the European Union and Parliament likely to promote a more liberal approach). The European Parliament, however, introduced a "notification light" regime, which requires a notification of pre-marketing activities. Both made it into the close-to-final text which has been released now.
II. Compromise between the EU trialogue parties
The now reached compromise between the EU co-legislators was published on 22 February 2019 (Proposal for a Directive of the European Parliament [...]; Proposal for a Regulation of the European Parliament [...]). As customary, this compromise will now be translated into all EU official languages and there may be minor technical edits to it before it is officially adopted by the EU co-legislators.
Definition of pre-marketing
The compromise defines the demarcation line between pre-marketing and marketing based on the type and status of the documents that are being provided.
The line into marketing is definitively crossed if
In order to avoid the line being crossed, and hence to stay within the pre-marketing sphere, the documents must be specifically marked as not being an offer to subscribe and must be clearly described as incomplete and subject to change. It needs to be ensured that draft fund documents do not contain sufficient information for the investor to make an investment decision.
From a German perspective, the compromise is not a substantial change to the current position taken by BaFin. However, the requirement that the investor should not be able to make an investment decision based on the draft documents may be problematic, as it could move forward the point where it is assumed that marketing takes place. Fund managers will therefore need to duly consider whether a draft limited partnership agreement may still be shared as part of their pre-marketing efforts.
Notification of pre-marketing
The compromise caters to the European Parliament's request of a notification requirement. EU AIFMs will be required to notify their national competent authority via informal letter (paper or electronic) of their pre-marketing activities within two weeks of it beginning such activities. The notification letter needs to detail
This information will then be passed on by the national competent authority to the competent authorities of the host Member States, which in turn may require additional information.
Having recourse to reverse solicitation will be prohibited for a period of 18 months following the beginning of pre-marketing.
Utilization of third parties
The provisional agreement further introduces specific requirements as to which third party might engage in pre-marketing on behalf of an authorized EU AIFMs. Permitted third parties would be authorized investment firms, credit institutions, UCITS management companies and AIFMs or tied agents in accordance with MiFID II.
In our view, the provisional agreement is excessive on this point. The activity of pre-marketing itself is not a regulated activity, as it is neither part of management of an AIF (only marketing is) nor can it, in our view, be considered as the reception and transmission of orders in relation to financial instruments as per MiFID II.
In Germany, this rather strict approach would also have ramifications on utilizing so-called financial advisors (Finanzanlagenvermittler) in accordance with § 34f German Industrial Code (Gewerbeordnung, GewO), as they could then only be used for assisting with marketing activities of notified funds, but not with respect to any pre-marketing activities.
Ex-ante verification of marketing material
The compromise also provides that national regulators may request to be provided with prior notification of all marketing communications relating to funds that are being marketed to retail investors. This may entail an additional layer of complexity when drafting the marketing materials for EuVECA funds, as under EU laws any investor that is not a MiFID professional investor is typically regarded as a 'retail investor'. It is hence not unlikely that qualifying venture capital fund investors under the EuVECA regulation would be seen as such. If this is the case, a national competent authority like the German BaFin would have the right to request to effectively sign-off on any such communication.
Who will be impacted?
While these changes will likely have a (substantial) impact on authorized EU AIFMs as well as EuVECA fund managers, we are of the opinion that the text as such, and consequently the proposed amendments, do not apply to sub-threshold managers.
This is based on the fact that reference is made to the utilization of the AIFMD passport – which is only available for fully regulated EU AIFMs – as well as the fact that the definitions used in the respective amending regulation explicitly relate only to AIFMs which have been fully authorized and EuVECA managers.
Although not explicitly included, the proposed changes, once implemented by national lawmakers, will likely also extend to third-country fund managers, as the recitals in the respective amending directive foresee that an EU AIFM may not be disadvantaged vis-à-vis a non-EU AIFM in any case with respect to these changes. The respective national implementations of the directive will thus need to be watched in detail.
The compromise will be adopted before the end of the European Parliament's term in May.
The changes included in the relevant directive regarding pre-marketing by authorized EU AIFMs will then need to be implemented into national law until presumably late summer 2021 (or, as for EuVECA managers, be effective from such date). Other provisions, such as the permission to allow national regulators to request the presentation of marketing material used vis-à-vis 'retail investors' will be effective before that time, likely late summer 2019.