On 2 August 2021, new pre-marketing rules in respect of alternative investment funds (“AIFs“) will come into force in the European Union (“EU“), via the EU Regulation 2019/1156 and the EU Directive 2019/1160 (the “Revised Rules”). The Revised Rules amend the existing directive on alternative investment fund managers (2011/61 / EU) (“AIFMD”) (as well as other EU legislation) to introduce an enhanced “pre-marketing” regime and other changes to the marketing regime implemented by the AIFMD. The Revised Rules may have significant consequences for alternative investment fund managers (“AIFMS”) domiciled and operating outside the EU who wish to market their products in the EU (i.e. “Third Country AIFMs”, referred to in the AIFMD as “non-EU AIFMS”).
The Revised Rules are currently drafted such that they only apply to EU AIFMs marketing EU AIFs to professional investors domiciled in the EU and, consequently, would not apply to non-EU AIFMS (i.e. UK based AIFMS). Therefore, non-EU AIFMS are subject to marketing funds under each EEA member states’ (“Member State”) national private placement regimes (“NPPRs”). Member States have introduced various requirements, ranging from simple ‘register and report’ regimes (such as in the UK) to a ban on private placement for non-EU funds (such as in Italy).
This article highlights a few key areas that UK AIFMS looking to market AIFs in the EU and the UK should consider.
The key areas of change are summarised below, for a detailed discussion on the changes, please see our previous newsletter here.
UK AIFMS MARKETING IN THE EU
Following the end of the Brexit transition period in January 2021, a UK domiciled AIFM is now considered as a Third Country AIFM. As a consequence, UK domiciled AIFMS looking to market AIFs in the EU will need to comply with additional obligations.
Therefore, when a Third Country AIFM markets an AIF in the EEA, regardless of where the AIF is formed, it must do so under the requirements of the NPPRs of the Member State in which it proposes to market the AIF and subject to the requirements of Article 42 of the AIFMD. The key obligations are:
- reporting certain matters to the regulator in each Member State where the AIF is marketed;
- making prescribed disclosures to the AIF’s investors;
- an additional annual report to be provided to AIF investors if the AIF raises money from investors in a particular Member State (including, for example, information about the remuneration of certain of the AIFM’s staff. This disclosure can be limited to remuneration of the AIFM’s staff who are fully or partly involved in the activities of the AIF that is marketed in the EU); and
- if the AIF acquires participations in, or acquires control of, a non-listed company registered in the EEA, making certain disclosures to the company itself and its shareholders.
UK AIFMS AND MARKETING IN THE UK
As indicated above, the Revised Rules have not been applied (and are not expected to apply) in the UK as it is no longer an EU Member State. This means that AIFMS who are marketing funds in the UK, will need to follow the AIFMD requirements that were “on-shored” into UK national law as well as FCA guidance for requirements to market a fund in the UK. “Marketing” has a specific meaning in the context of the AIFMD UK regulation, which is in some respects different from the AIFMD definition. For example, PERG 8.37.5 clarifies the Financial Conduct Authority’s (“FCA”) interpretation of what “offering” and “placement” mean, commenting that an offering or placement occurs in the UK when a person seeks to raise capital by making a unit or share of an AIF available in the UK for purchase by a potential investor located in the UK (please click here for a direct link to PERG, AIFMD marketing). This includes situations that constitute:
- a contractual offer that can be accepted by a potential investor to make the investment and form a binding contract; or
- an invitation to the investor to make an offer to subscribe for the investment.
Therefore providing a UK based investor with a private placement memorandum and a subscription agreement will amount to marketing for UK purposes, triggering the requirement to make an NPPR notification to the FCA. Marketing in the UK that does not meet these criteria will not trigger an NPPR notification and the consequent reporting and disclosure requirements listed above.
IMPACT ON UK SPONSORS
Where an EU AIFM uses a third party distributor to carry out pre-marketing activities on its behalf, the third party will also be subject to the Revised Rules’ requirements. This means that an EU AIFM will need to ensure that the distributor is itself either an authorised EU AIFM, an authorised EU investment firm, EU UCITS manager, EU tied agent or an EU-authorised credit institution (“EU Authorised Firms”).
As the Revised Rules are not applicable to UK AIFMS, pre-marketing, marketing and any marketing activities to EU investors will need to be carried on by EU Authorised Firms. Therefore UK sponsors will not be able to carry out pre-marketing or marketing activities in the EU in relation to an EU AIF managed by an EU AIFM (despite the fact that it may provide delegate portfolio management services or investment advice to the EU AIFM). Practical solutions could be to appoint an introducer with its own EU Authorised Firm as a principal or establishing a new EU domiciled entity that can carry out these activities separately.
UK AIFMs marketing in the EU via the NPPRs will need to monitor whether the EU Member State into which it wants to market the AIF will apply the Revised Rules or whether the Member State has applied alternate private placement routes and requirements to ensure it is following the most up to date version of applicable regulations.
To view Regulation (EU) REGULATION (EU) 2019/1156, please click here.
To view Directive (EU) 2019/1160, please click here.
For more information, and any guidance or advice on cross-border fund distribution, Cleveland & Co, your External in-house counsel™, are here to help.