EU Sets More Stringent Rules on Pre-Marketing of AIFs

For managers of alternative investment funds (AIFM), distinguishing between marketing and pre-marketing is treading a thin line. The distinction is significant: marketing requires that managers submit a notification to the authorities, which they are reluctant to do if they are uncertain of the investors’ interest in the fund.  Pre-marketing requires less paperwork.

Briefly put, marketing means offering units or shares of alternative investment funds (AIF) to investors. In contrast, pre-marketing – or soft circling, as it is also known – occurs, for example, when an AIFM based in an EU Member State is testing whether professional investors might be interested in a given type of investment.

To reduce doubt, the European legislators recently clarified the line between marketing and pre-marketing through Directive (EU) 2019/1160 of the European Parliament and of the Council. The Directive must be implemented by the Member States by 2 August 2021; the Finnish government has not yet proposed a bill to that effect.

What will change with the Directive?

Uniform Definition and Rules for All Member States

Until now, the rules governing pre-marketing have been ambiguous. The Directive seeks to change this by establishing a harmonised definition of pre-marketing that will be applied in all Member States. In other words, AIFMs should be able to presume that the same rules apply to pre-marketing across the European Union. However, the outcome depends on how Member States transpose the Directive into their national laws.

The Directive specifies three key characteristics for pre-marketing:

In addition, the Directive imposes additional criteria on pre-marketing that concern, e.g. the accuracy of the information provided to investors. For example, if the AIFM gives a draft prospectus or offering document to a client as part of its pre-marketing, the draft must clearly indicate two things: firstly, that it does not constitute an offer or an invitation to subscribe to units or shares of the AIF, and secondly, that the information in it should not be relied upon because it is incomplete and may change.

Only Authorised Intermediaries May Participate in Pre-Marketing

Pre-marketing is not always carried out by the AIFM. Instead, the manager may wish to enlist an intermediary with special expertise of a given industry or of investor behaviour in a given country. In such cases, the Directive prescribes that the intermediary must be an authorised investment firm (or a tied agent), a credit institution, a UCITS management company or an AIFM.

Pre-Marketing Becomes Supervised by Authorities

In the future, the pre-marketing activities of an AIFM will be supervised by authorities. AIFMs based in the EU must inform the competent authority of their home Member State about pre-marketing by submitting a free-form notification no later than two weeks after they have begun pre-marketing. AIFMs must also adequately document their pre-marketing.

Scope of Reverse Solicitation Restricted

Until now, an AIFM that has not submitted a notification on marketing has been able to claim that investors who have subscribed for fund units have contacted the manager on their own initiative. This is known as ‘reverse solicitation’. The Directive considerably tightens the prerequisites for reverse solicitation. From now on, if professional investors subscribe for units or shares in the AIF within 18 months from the beginning of pre-marketing, it will be considered the result of marketing, and the AIF manager must submit a marketing notification.

Next Steps in Harmonisation of AIFM Rules

The Directive is the latest phase in the EU’s efforts to harmonise the regulation governing AIFMs, which began in 2011. In 2021, when Member States are to implement the Directive, we will have witnessed a decade of harmonisation. It will be interesting to see what domain of regulation the legislators will tackle next.  For example, will AIFMs have to comply with the product governance requirements similar to those applied to investment service providers under the MiFID II regime? Only time will tell.