The European Commission has been active the last couple of days. Not only has it presented its so-called FinTech Action Plan, but it also released a proposal to create a legal framework for Crowdfunding Service Providers. Additionally, it has presented a Regulation and a Directive (the "Proposal") to facilitate the cross-border distribution of investment funds. The Proposal will, if enacted, introduce a European-wide definition of "pre-marketing". This SMP Briefing aims to present the proposed changes to the "pre-marketing" concept and illustrate the effects it may have on marketing of funds in the EU.
The EU Commission proposes to amend the AIFM-Directive and the EuVECA regulation in order to include a European-wide definition of "pre-marketing". This was seen by the EU Commission as a necessary step, as there are still far too many different interpretations on national level of what actually constitutes "pre-marketing". This is true, and should therefore generally be regarded as a welcomed step by anyone who has ever been involved with figuring out the different pre-marketing regimes in different member states in anticipation of marketing a fund. But, as always, the devil is in the details. And while the general idea of defining "pre-marketing" on a European level is good and justified, the Proposal in its current form is not. It is proposed by the EU Commission to insert a new definition under point (aea) in Article 4 (1) of the AIFMD and point (o) in Article 3 of the EuVECA regulation which would read
In the view of the EU Commission, an AIFM should only be allowed to test an investment idea or an investment strategy with professional investors but may not promote an established EuVECA fund/AIF without notification.
Additionally, a new Article 30a in the AIFMD and Article 4a in the EuVECA regulation would be inserted which would set out the conditions for relying on pre-marketing by EU AIFMs and EuVECA managers by listing certain actions which would exclude such reliance. According to the Proposal, reliance on pre-marketing cannot occur if the information presented to potential investors
The above conditions expressly only apply to (authorized) EU AIFMs and EuVECA managers, but not to non-EU AIFMs marketing their funds in accordance with Art. 42 AIFMD under individual national private placement regimes.
The Proposal also foresees that if there is pre-marketing, it should not need to be notified to the regulator in the respective member states, which makes sense and is the case right now.
Further, the Proposal expressly points out that once the pre-marketing activities of the EU AIFM/EuVECA manager are concluded and subsequently offers for subscription to an EuVECA fund/AIF, which has similar features to the "pre-marketed investment idea", are made, the appropriate marketing notification procedures must be observed and the AIFM/EuVECA manager could not rely on reverse solicitation in this case. The latter is not surprising as pre-marketing activities are usually instigated at the initiative of the manager and therefore there should consequently not be a (legitimate) reverse solicitation basis to rely on.
Consequences for marketing activities
This approach by the EU Commission narrows and restricts the concept of "pre-marketing" unnecessarily and is stricter than the current positions taken on "pre-marketing" by most of the important EU regulators. Not only does the proposed definition of "pre-marketing" narrow the concept, it also brings forward the date on which actual "marketing" starts to a much earlier point in time. The approach taken essentially means that any action undertaken once the EuVECA fund/ AIF is established or, if it has not been established, even providing potential investors with an early draft of the fund documents would rule out "pre-marketing" and be considered "marketing" instead. This means that EU AIFMs and EuVECA managers would need to consider applying for marketing licenses much earlier in order to be compliant. Fair enough - due to the recent changes to the EuVECA regulation and the abolishment of fees at national level for marketing notifications (see our previous SMP Briefing), the EuVECA managers at least do not need to take into considerations these monetary aspects, but it nonetheless requires additional administrative efforts. EU AIFMs on the other hand, of course, do not have such a privilege as regards the costs of filings. The requirement to file in more jurisdictions will increase their costs (even when using the marketing passport), as national regulators still charge fees for processing the (passport) marketing notifications.
In addition, it is difficult to see how EU AIFMs and EuVECA managers will be able to comply from a practical perspective: in order to be able to apply for marketing notifications, regulators typically require that fund managers submit near final fund documentation (in particular with a view to complying with disclosure obligations). If the Proposal were adopted, it would however require fund managers to apply for marketing notifications at a very early stage in the fundraising process, where certain information is likely not be existent and could therefore not be provided. Fund managers would therefore need to decide how to proceed in such cases: submit documentation which is far from being final, but declare it (near) final in order to receive a marketing notification, or submit at a later stage and risk running afoul of the marketing requirements? If they were to submit at a very early stage, subsequent "material changes notifications" are likely to arise and slow down the fundraising process further (due to review by regulators of these changes).
The proposed changes to the concept of "pre-marketing" should however not directly affect third-country AIFMs marketing their funds in the European Union, as only EU AIFMs are expressly mentioned in the new Article 30a AIFMD. It remains to be seen if the Proposal, if adopted in its current form, would have an indirect effect on the marketing activities of third-country AIFMs due to national regulators voluntarily amending and bringing in line their understanding of marketing/pre-marketing.
Also, and even though the EU Commission expressly mentions in the recitals that AIFMs "should not be able to invoke reverse solicitation" where they relied upon pre-marketing, this does not mean that the concept of "reverse solicitation" itself is affected by these changes. Naturally, if the fund managers are the once initiating contact, be it in a pre-marketing or marketing phase, reverse solicitation (passive marketing) will not apply. Provided, however, investors approach the fund managers and there is a (legitimate) reverse solicitation basis, the (active) marketing rules in general do not apply – meaning also that there needs to be no distinction made whether any actions constitute "pre-marketing" or "marketing". Consequently, no registrations/marketing notifications are required in such cases.
While the general idea of creating a pan-European definition for "pre-marketing" is welcomed, the current Proposal does not sufficiently take into account the practical needs of fund managers in the European Union and, against its own goals, does not in its current form help to create a Capital Market Union. It instead feels like, once more, additional layers of regulation are being put on top of already (sufficiently) supervised fund managers.
Currently, the Proposal is just that – a proposal. The EU Commission is open to receive feedback from the industry, interest groups etc. until the 7th of May. Following the feedback period, the EU Commission will present a summary of the feedback received to the European Parliament and the Council and will engage in the legislative debate, which will hopefully lead to a more practical focused approach to defining "marketing" and "pre-marketing" activities of fund managers. Once the Proposal, in whichever shape or form, passes through the legislative processes of the European Union, the relevant provisions would apply 24 months after its publication in the Official Journal of the European Union.
It is hence for now only another regulatory project on the horizon, but nonetheless something that persons in this field should keep a close eye on (and ideally get involved with) as its impact could be felt long down the road.