Harmonisation of the ‘pre-marketing’ regime
The CBDF introduces a new harmonised ‘pre-marketing’ regime under the AIFMD for EU-authorised AIFMs (EU AIFMs) marketing units or shares in EU AIFs that are either not yet established or are established but not yet notified for marketing in the EU. This means that registered AIFMs will not be able to benefit from the pre-marketing regime, and the impact this new regime will have on non-EU AIFMs is currently unclear.
The new regime only permits pre-marketing activities that are addressed to professional investors (as defined in the AIFMD) in the EU and provided that there is no ‘offer or placement’ (as defined in the AIFMD) of the relevant units in the AIF to such investors.
Procedure
In order to benefit from the new pre-marketing regime, the following procedure must be followed:
- Any pre-marketing information presented to professional investors by an EU AIFM must not (i) be sufficient to allow investors to commit to investing in the units of a particular AIF; (ii) include subscription forms or similar documents, whether in draft or final form; and (iii) include the final form constitutional documents, prospectus or offering documents of a not-yet-established AIF. Drafts of the constitutional documents and/or offering material can be circulated to professional investors provided that the documents (i) do not contain sufficient information to allow the investors to ‘take an investment decision’, (ii) clearly state that they do not constitute an offer or an invitation to subscribe for units in the AIF, and (iii) confirm that the information should not be relied upon as it is incomplete and subject to change. Given the vagueness of the test and definition of ‘pre-marketing’, there is a risk that member states’ regulators may interpret the scope of the pre-marketing regime differently. Although, it is hoped that clarity and guidance at the EU level will minimise this risk.
- Within two weeks of commencing the pre-marketing activities, the EU AIFM seeking to benefit from this regime must notify its home member state regulator. The CBDF does not dictate the form of the notification. However, it must include (i) details of the AIF subject to the pre-marketing activities, (ii) an outline of the pre-marketing materials used, and (iii) details of the member states in which the pre-marketing is being conducted. The home member state regulator will in turn notify those member states of the pre-marketing activities in that jurisdiction. It is important to note that this pre-marketing notification is distinct from and separate to the formal marketing notification process required under the AIFMD. In this regard, EU AIFMs must ensure that professional investors (i) do not invest in an AIF through their pre-marketing activities, and (ii) only invest in the pre-marketed AIF through the formal marketing notification process mandated under the AIFMD, if the professional investors are contacted as part of the EU AIFM’s pre-marketing activities.
Reverse solicitation
Under the new regime, an EU AIFM will be unable to rely upon reverse solicitation arguments for a period of 18 months from commencement of pre-marketing activities when it makes use of the pre-marketing regime. This means professional investors subscribing for units in an AIF within the 18 months of the EU AIFM having pre-marketed that AIF will be treated as subscribing as a result of marketing, which is notifiable under the AIFMD. The CBDF is not entirely clear as to whether this restriction is applicable to all subscriptions in the AIF that have been pre-marketed or simply that the EU AIFM will be unable to rely upon reverse solicitation in respect of individual investors who have received pre-marketing documentation. It is hoped that further clarity will be provided in due course.
Impact on placement agents
The CBDF allows placement agents and distributors to carry out pre-marketing activities on behalf of EU AIFMs but only if they (i) are EU regulated firms or tied agents, and (ii) comply with the new pre-marketing regime. This will curtail the circumstances in which agents unregulated in the EU or based outside of the EU will be able to pre-market interests on behalf of the EU AIFM under the new pre-marketing regime.
The CBDF extends the pre-marketing provisions to EuVECAs and EuSEF.
Pre-marketing in the UK
The CBDF will not be implemented in the UK, but the UK has a permissive pre-marketing regime under the UK implementation of the AIFMD. In essence, the FCA takes the view that any documentation or information disclosed to investors that is in draft form (so investors are unable to subscribe for the units on the basis of such documentation) does not constitute ‘marketing’ under the AIFMD. Unlike the CBDF, the UK pre-marketing regime does not require any notifications to be made to the FCA. Rather, such pre-marketing activities must comply with the UK financial promotion regime.
Discontinuation of marketing
The CBDF imposes new rules for the discontinuation of marketing of an EU AIF. In order to cease marketing, an EU AIFM in a host member state must send a notice of de-notification to its home state regulator. Discontinuation will be effective provided that:
a) There is a blanket offer to repurchase or redeem all units or shares of the UCITS or AIF(s) that are held by investors in that member state (free of charge or deductions). This offer must be:
i. Publicly available for at least 30 working days
ii. Addressed (directly or through intermediaries) individually to all investors in the host member state whose identity is known
b) The intention to stop marketing EU AIF units in that member state is made public by means of a publicly available medium (including electronic means) that is ‘customary for marketing’ AIFs and suitable for a ‘typical’ AIF investor.
c) Contractual arrangements with any financial intermediaries or delegates are modified or terminated with effect from the date of de-notification to prevent units or shares in the AIF, which is being de-notified, from being offered or placed.
Note that condition (a) above does not apply in the case of closed-ended AIFs and European Long-Term Investment Funds.
For 36 months following the date of a marketing de-notification, the EU AIFM may not market units in the EU AIFs that have been de-notified, nor can the EU AIFM engage in marketing similar investment strategies or ideas in the member state in which the de-notification has been made.
The CBDF introduces a near identical de-notification requirement for UCITS management companies.
Marketing communications
The CBDF establishes principles that will govern marketing communications from AIFMs and UCITS management companies. Broadly, these require that marketing communications are:
- Identifiable as such
- Present the risks and rewards of purchasing units of an AIF or a UCITS in an equally prominent manner
- Fair, clear and not misleading
AIFMs are required to ensure that no marketing communication that constitutes an invitation to purchase units or shares of an AIF contains information that contradicts the pre-investment disclosures that must be made available to investors under article 23 of the AIFMD.
Additionally, UCITS management companies are further required to ensure that marketing communications:
- Do not contradict the information contained in the UCITS prospectus or key investor information document (KIID), or diminish its significance, if they contain specific information about the UCITS
- Indicate that a prospectus exists and that the key investor information is available
- Specify where, how and in which language investors or potential investors can obtain the prospectus and KIID information
AIFMs that are obliged to publish a prospectus under the Prospectus Regulation (EU 2017/1129) or a KIID under the PRIIPs Regulation are subject to the same requirements applicable to UCITS management companies.
How can we help?
Reed Smith can assist you to navigate your way around the new regime. We can help you:
- Stay up to date: advising on the scope of the CBDF, member state implementation and divergences in the approach to pre-marketing and marketing activities, pre-marketing notifications and the availability of reverse solicitation following a pre-marketing notification, and requirements for the discontinuation of marketing.
- Review documentation: reviewing all pre-marketing and marketing documentation to ensure that it includes the required disclaimer language.
- Update policies and procedures: updating your policies and procedures to ensure they capture all pre-marketing and marketing activities, including instances of reverse solicitation. Internal policies should address the scope of pre-marketing and marketing activities and EU AIFMs should consider whether any internal training on these concepts is required. Policies, procedures and training should equip staff to identify when pre-marketing activities may stray into marketing.
Client Alert 2021-114
