3 juin 2021 Investment Funds

Marketing and Third Country Provisions

Overview

Current methods of marketing under AIFMD

There are currently two methods for marketing to professional investors (see below for guidance on the definition of “marketing”) under AIFMD: (i) the EU marketing passport and (ii) the Member States’ private placement regimes.  Whether a particular marketing method is available depends on the jurisdiction of the AIFM and the relevant AIF. The marketing passport is currently only available for EU AIFMs marketing EU AIFs. Any other combination of EU / non-EU AIFM and EU / non-EU AIF must rely on the private placement regimes in each EU state the AIFM wishes to market into (noting that private placement regimes are not available in all EU Member States). See below for how this translates for the UK following its exit from the EU.

EEA relevance

AIFMD is marked “with EEA relevance”. This means that it was intended to be adopted under the agreement constituting the European Economic Area (“EEA”), and it was so adopted in 2016 (see here for more information). From the date of adoption, AIFMD has the same legal effect in non-EU countries within the EEA (i.e. Iceland, Liechtenstein and Norway) as in EU Member States. Nevertheless, for consistency with the AIFMD text, in this site we refer to “EU” and “non-EU” rather than “EEA” and “non-EEA”.

Extension of pan-European marketing passport and phasing out private placement regimes

When enacted, AIFMD envisaged that the pan-European marketing passport may be extended at a later date to cover both EU AIFMs and non-EU AIFMs in respect of both EU AIFs and non-EU AIFs. Once the passport is extended, a Non-EU AIFM will be required to be authorised by its “Member State of Reference” (see below for details). The non-EU AIFM will be required to comply with all of the provisions in AIFMD (including the depositary requirements) and certain other requirements, depending upon whether the AIF is EU or non-EU, including: co-operation arrangements, tax information sharing, and the non-EU AIF must not be established in a jurisdiction that is designated as non-cooperative by FATF.

AIFMD required ESMA to review the marketing regimes two years after AIFMD was implemented, and provides that the process for extending the marketing passport would only be initiated upon receipt of positive advice from ESMA. ESMA reviewed the existing marketing regimes permitted under the AIFMD and issued two waves of advice:

  • The first on 30 July 2015, concluding that there were no significant obstacles to extending the advice of Guernsey and Jersey, as well as Switzerland pending certain amendments to Swiss legislation. However, at the time ESMA recommended delaying the decision in respect of the United States, Hong Kong and Singapore.
  • The second on 19 July 2016, concluding that there were no significant obstacles to extending the passport to Canada, Guernsey, Japan, Jersey and Switzerland. This was also the case for Hong Kong and Singapore. ESMA also indicated that there were no significant obstacles for Australia pending certain amendments to Australian regulation. In respect of the United States, ESMA suggested extending the passport in limited circumstances, and proposed three alternatives for consideration by EU legislators. However, ESMA was not able to provide definitive advice on Bermuda, the Cayman Islands and the Isle of Man.

As of May 2021, the European Commission has not yet taken the necessary steps to extend the AIFMD passport to third countries.

AIFMD also envisages that the private placement regime could be phased out in future. ESMA is expected to undertake a review of the private placement regime three years after legislation is adopted by the European Commission to extend the marketing passport to this countries, and ESMA would ultimately issue technical guidance advising whether or not the private placement regime should be terminated.

In the event that passporting is made available to non-EU AIFMs and AIFs, certain countries may no longer offer the private placement regime before any EU measures on private placement take effect. For example, legislation in connection with Germany’s implementation of AIFMD would abolish Germany’s private placement regime where the marketing passport is extended to third countries.

The table below shows the marketing methods currently available for the various combinations of EU / non-EU AIFMs and AIFs:

AIFM / AIF EU marketing passport currently available Private Placement Regime
EU AIFM & EU AIF (Article 32) n/a
EU AIFM & non-EU AIF X (Article 36)
Non-EU AIFM & EU AIF X (Article 42)
Non-EU AIFM & non-EU AIF X (Article 42)

Passporting

Marketing and passporting by EU AIFM of EU AIFs to Professional Investors – Article 32

Under AIFMD, managing an EU AIF and marketing an EU AIF to professional investors is permitted if the AIFM is authorised under AIFMD and the relevant competent authority has given its approval. An EU AIFM may also benefit from an EU marketing passport in respect of EU AIFs that are marketed to professional investors, provided that certain conditions are met (see below).

For the purposes of AIFMD, the term “professional investors” is defined as any investor that is considered as, or may be treated as, a professional client under MiFID II.

Marketing approval process

  • Under AIFMD, when marketing under the “passport” regime: an EU AIFM must notify its home regulator of the AIF it wishes to market. This notification must include: (a) the AIF rules, (b) the identification of the depositary, (c) information on the AIF which is available to investors (see “Disclosure to investors” in the Disclosure and Reporting section), and (d) where relevant, information on arrangements to prevent the AIF from being marketed to retail investors. If the AIFM also wishes to market the AIF in other EU Member States, it must submit the identity of those Member States in the notification at this stage.
  • The home regulator must inform the EU AIFM within 20 working days of receipt of the notification above whether it may start marketing activities to professional investors in such Member States. The home regulator may only prevent such marketing if information provided in the notification demonstrates that the EU AIFM’s management will not be in accordance with AIFMD.
  • Where the EU AIFM wishes to market in other Member States, the home regulator must transmit the notification documentation to the regulator of the relevant Member State within 20 working days. Upon transmission, the home regulator shall notify the EU AIFM ‘without delay’ of such transmission and the EU AIFM may market to professional investors in the relevant Member State from the date of such notification.
  • If there is any material change to any of the information provided by the EU AIFM, the EU AIFM must give prior written notice of such change to its home regulator. Click here for further details.

Extension of pan-European marketing passport

When the passport becomes available for non-EU AIFMs the process is expected to be similar, save that the regulator of the non-EU AIFM’s "Member State of Reference" shall carry out all home regulator duties referred to above.

A non-EU AIFM wishing to apply for a pan-European passport must establish a legal representative in an EU Member State to act as a contact with the relevant regulator. The relevant EU Member State (referred to as the “Member State of Reference”) is determined depending on a number of factors, including where the AIF in question is established and to whom the AIF will be marketed, and in more complex cases may require consultation amongst various EU Member State regulators and ESMA.

How does this apply to the UK?

UK AIFMs no longer benefit from the EU marketing passport following the end of the Brexit transition period, and therefore UK AIFMs seeking to market AIFs in the EU need to do so via national private placement regimes (where these have been enacted in individual Member States) or pursuant to any temporary permissions that may have been implemented by Member States.

Similarly, EU managers can no longer passport their AIFs for marketing into the UK. However, immediately following the end of the transition period at 11pm (UK) on 31 December 2020, a short-term temporary marketing permissions regime (the “TMPR”) began operating to ensure that funds being marketed in the UK prior to that date could continue to access the UK market for a limited period, provided such funds notified the FCA of their wish to continue marketing under the TMPR. This is discussed in further detail on the Brexit page. Once EU firms have been allocated a ‘landing slot’ by the FCA, those firms will need to submit an application to market in the UK pursuant to the UK national private placement regime, as detailed below.

Gibraltar AIFMs continue to benefit from passporting in the UK.

Private placement

When implementing AIFMD into national law, each EU Member State was entitled to decide whether or not to implement the national “private placement” regimes contained in AIFMD (Article 36 and Article 42). As such, some EU Member States have implemented marketing regimes as envisaged under Article 36 and Article 42 of AIFMD, others have implemented a modified version of the regimes (e.g. imposing stricter requirements on AIFMs) and others have elected not to implement these provisions. AIFMs intending to market on the basis of these regimes should therefore be aware that: (i) they are not available in all EU Member States, (ii) where they are available, the legislation implementing private placement will differ in each applicable EU Member State and therefore the process for complying with these regimes will differ on a case by case basis, (iii) each EU Member State may charge upfront and ongoing fees for marketing in their state and (iv) the national private placement regimes may cease to be available in future.

Article 42 interactive map

Please click here to view a map providing a high-level overview of the Article 42 regimes available across the EEA.

Non-EU AIFM marketing Non-EU AIFs to professional investors - Article 42 requirements

A non-EU AIFM may market a non-EU AIF to EU professional investors under Member States’ private placement regimes. However:

  • the non-EU AIFM must comply with the disclosure and reporting obligations, and the requirements on portfolio company disclosure and asset stripping;
  • there must be co-operation agreements in place between the relevant regulators (between the home regulator and the relevant third country regulator), and the non-EU AIFM; and
  • where relevant, the non-EU AIF must not be established in a country designated as non-cooperative by FATF.

Member States may also impose stricter marketing requirements on the non-EU AIFM. 

Non-EU AIFM marketing EU AIFs to professional investors – Article 42 requirements

The requirements under AIFMD are the same as for a non-EU AIFM marketing a non-EU AIF (see above).

EU AIFM marketing Non-EU AIFs to professional investors – Article 36 requirements

Under AIFMD, an EU AIFM is able to market non-EU AIFs to professional investors under Member States’ private placement regimes. The EU AIFM must comply with all of the provisions in AIFMD except for the depositary requirements. However, the EU AIFM will be responsible for ensuring that an entity is in place to perform certain duties of a depositary, as set out in AIFMD. Additionally, there must be co-operation arrangements in place and the non-EU AIF must not be established in a jurisdiction that is designated as non-cooperative by FATF. Member States may also impose stricter marketing requirements on the EU AIFM. 

Articles 42 and 36 in the UK

As noted above, it is no longer possible for EU AIFMs to passport their funds to market to professional investors in the UK. Therefore, subject to any temporary permissions, Article 42 as it is implemented in the UK (Regulation 59 of the UK Regulations) is the main route for EU AIFMs (and other Non-UK AIFMs) to market EU and non-EU AIFs in the UK. Similar requirements apply for marketing under Article 42 in the UK as are noted above for Article 42 in the EU.

Applications must be made by the relevant AIFM via FCA Connect. The notification must include a declaration from the AIFM that the management of the AIF complies with the relevant conditions in the UK Regulations. The relevant AIFM is technically permitted to start marketing under the UK private placement regime as soon as it has submitted the relevant marketing notification to the FCA.

Article 36 as it is implemented in the UK (Regulation 57 of the UK Regulations) also no longer applies to EU AIFMs, although does still apply to UK and Gibraltar AIFMs marketing non-UK AIFs in the UK. Similar requirements apply for marketing under Article 36 in the UK as are noted above for Article 36 in the EU.

AIFMs marketing under Article 36 should also apply via FCA Conncect – this process will usually be completed whilst on-boarding the relevant AIF for management by UK AIFMs.

The relevant FCA webpage on NPPR in the UK is available here.

AIFMs are required to notify the FCA of any changes to the information previously submitted to the FCA in respect of the marketing of AIFs under the private placement regimes. Please click here for further information on material change notifications.

Cross border distribution of funds Directive and Regulation

On 12 July 2019, the EU introduced Directive (EU) 2019/1160 of the European Parliament and of the Council of 20 June 2019 (the “CBDF Directive”) amending AIFMD. The CBDF Directive is accompanied by Regulation (EU) 2019/1156 of the European Parliament and of the Council of 20 June 2019 (the “CBDF Regulation”) (together, the “CBDF package”).

Linklaters clients can access a recording of our Asset Management Spotlight webinar on the CBDF package held in March 2021.

Pre-marketing

One of the main criticisms of the AIFMD marketing framework as it was originally enacted has been the differing interpretations of the term “marketing” across Member States. For example, the UK and Luxembourg interpret the marketing concept as applying at a relatively late stage (when the offer of interests in an AIF is capable of being accepted by investors on final form subscription documents), while in other countries, AIFMD marketing activity is interpreted as taking place much earlier. This created a catch-22 situation for managers of certain private funds as typically, before establishing and finalising the terms of such funds, they will want to pre-market in order to assess whether there is demand for the relevant products, and will want to discuss and test some of the terms. However, it is impractical or impossible to approach investors to assess demand in a country that regards these initial discussions as “marketing” requiring the fund to be established and largely fully documented.

The CBDF package seeks to address this issue by introducing a new harmonised pre-marketing regime into AIFMD. The pre-marketing rules must be implemented in EU Member States by 2 August 2021.

The CBDF Directive defines “pre-marketing” as the:

“provision of information or communication, direct or indirect, on investment strategies or investment ideas by an EU AIFM or on its behalf, to potential professional investors… in order to test their interest in an AIF or a compartment which is not yet established, or which is established, but not yet notified for marketing… and which in each case does not amount to an offer or placement to the potential investor to invest in the units or shares of that AIF or compartment”

The CBDF Directive inserts a new Article 30a in Chapter VI of AIFMD that sets out certain conditions on any pre-marketing by an EU AIFM marketing under a passport. This includes an obligation to notify the relevant competent authority via an informal letter within two weeks of the EU AIFM having begun pre-marketing activities. Any information presented to those potential professional investors must not be sufficient to allow them to commit to acquiring units or shares in a particular AIF. The aim is that any information or documentation provided must make it clear that it is subject to change and not yet in final form or amount to subscription forms or similar documents.

Although the rules explicitly only apply to marketing AIFs under a passport, a recital in the CBDF Directive notes that national rules cannot in any way disadvantage EU AIFMs vis-à-vis non-EU AIFMs. Therefore, some EU Member States may apply similar pre-marketing rules under their national private placement regimes.

Denotification of marketing

A new formalised procedure for denotifying marketing in EU Member States comes into force on 2 August 2021. AIFMs will be able to discontinue marketing a fund in a particular Member State provided that certain conditions are fulfilled and a denotification filing made with its home state regulator.

The conditions are (i) making a blanket offer to repurchase or redeem units held by investors in the relevant Member State (free of any charges or deductions) which is publicly available for at least 30 working days and is addressed individually to all investors in that Member State whose identity is known (this condition does not apply to closed-ended AIFs); (ii) publicising the intention to terminate marketing arrangements; and (iii) terminating or modifying any relevant contracts with financial intermediaries to ensure they do not continue to market those units.

Once an AIF is denotified from marketing, the AIFM may not then engage in pre-marketing that AIF, nor another AIF with a similar investment strategy or investment idea, in that Member State for a period of 36 months from the date of denotification.

Marketing Communications

Another notable change to current rules for funds under the AIFMD umbrella at least, is the application of similar standards of marketing communications to EU AIFMs and UCITS under the Regulation. These come into force on 2 August 2021.

In particular, AIFMs must ensure that all marketing communications addressed to investors are identifiable as such, describe the risks and rewards of purchasing units or shares in an equally prominent manner, and that all information included in marketing communications is fair, clear and not misleading. Statements in marketing materials must not contradict or diminish the significance of information in other communications to investors (i.e., the Article 23 disclosures).

On 27 May 2021, ESMA  issued its final report on guidelines on marketing communications, which is available here. See our note on the guidelines here.

Marketing to retail investors

Each Member State may allow an EU and non-EU AIFM to market an AIF to retail investors on its territory irrespective of whether the AIF is marketed on a domestic or cross-border basis or where it is established. However, in such cases, the Member State may impose stricter or additional requirements on such marketing (as compared to the requirements applicable to professional investors in their territory) but may not impose stricter requirements on the marketing of an EU AIF to retail investors on a cross-border basis than for an AIF marketed to retail investors domestically.

Member States are required to notify the European Commission and ESMA of the types of AIF which an AIFM may market to retail investors on their territory and any additional requirements that the Member State imposes on the AIFM.

The UK has implemented AIFMD in a way that permits an AIFM to market to retail investors in the UK, subject to certain additional restrictions.

Whereas the marketing activities of an AIFM to professional investors in the UK need only comply with either the UK Regulation or the UK financial promotion regime (depending on when the marketing occurs, see the UK guidance below), where a person intends to market an AIF to a retail investor in the UK, the AIFM may be required to comply with both the UK Regulation and the financial promotion regime (notably Sections 21 (restrictions on financial promotion) or 238 (restrictions on promotion) of FSMA).

The UK government has enacted a new a fast track regime for non-UK funds to be marketed to retail investors in the UK – please see our note for further details.

Small AIFMs

Sub-threshold AIFMs (please see the Small AIFMs section for more details) are not, unless they opt in, subject to the full compliance with AIFMD. Such AIFMs cannot therefore avail themselves of a pan-European marketing passport in relation to the AIFs they manage and do not have the right to market AIFs they manage to investors in other EU Member States. To determine whether they are able to market AIFs to another EU Member State they will therefore need to consider the national law in such EU Member State.

Subject to fulfilling the relevant requirements, such small AIFMs may be able to access a pan-European passport under the EuVECA Regulation or the EuSEF Regulation (see below for further detail).

EuVECA and EuSEF regime

As indicated above, even if otherwise eligible for this mode of marketing, Sub-threshold AIFMs cannot avail themselves of the pan-European marketing passport unless they subject themselves fully to all of the requirements of AIFMD. The ability for Sub-threshold AIFMs to stay outside the majority of the provisions of AIFMD in the first place was a recognition by the European officials that such AIFMs will often simply not have the resources necessary to put in place all the various policies and procedures required by AIFMD. In order not to create unduly high barriers to marketing for such funds undermining the benefits of AIFMD light regulation, the EU has introduced separate pan-European marketing passports for European venture capital funds under the EuVECA Regulation and European social entrepreneurship funds under the EuSEF Regulation.

UK guidance on marketing under AIFMD

The FCA has issued helpful guidance on the UK’s interpretation of AIFMD marketing in the Perimeter Guidance Manual (PERG) 8.37. The guidance covers a range of topics, including:

How is “marketing” interpreted in the UK: AIFMD’s definition of marketing refers to an AIFM making a “direct or indirect offering or placement of units or shares…” to investors domiciled or with a registered office in the EU. The terms “offering” or “placement” are not defined in the UK Regulation but are considered to take place when a person seeks to raise capital by making a unit or a share of an AIF available for purchase by a potential investor (e.g. situations which constitute a contractual offer that can be accepted by a potential investor, such as supplying the investor with final documents and subscription materials).

Marketing using draft documents: communications with investors relating to draft documentation (e.g. promotional presentations, pathfinder prospectuses or draft transaction documents) would not constitute an offer or placement under the UK Regulation.

NB: as noted above, there is no EU-wide guidance on the interpretation of “marketing” and therefore other EU Member States will interpret “marketing” differently and will likely consider “marketing” to occur at a much earlier stage in the marketing process. The CBDF package has been introduced to address this. The CBDF package will not apply in the UK however.

Reverse solicitation: the UK Regulation does not apply to an offering or placement of units or shares of an AIF to an investor made at the initiative of that investor (i.e. reverse solicitation). UK guidance provides that an AIFM should obtain a confirmation from the investor, before the offer or placement takes place, that the offering or placement was made at the investor’s initiative in order to evidence the reverse solicitation. However, AIFMs should only rely upon such confirmation if it is genuine and has not been obtained purely to circumvent the requirements of AIFMD.

Who is the Investor: the “investor” is the person who makes the decision to invest in an AIF. Therefore, it is not simply a case of identifying the person that subscribes directly to an AIF. An AIFM should “look through” the person subscribing for the units or shares where the ultimate purchaser has engaged such person to subscribe to the AIF on the ultimate purchaser’s behalf (e.g. through a nominee company).

Interaction with financial promotion rules: activities that do not constitute AIFMD marketing in the UK may still fall within the remit of the UK financial promotions regime (e.g. sending investors draft documentation or marketing presentations).