AIFMD: when compliance goes wrong

Here’s a problem facing non-EU compliance teams: European LPs are looking to re-up in the firm’s next fund, but sending them any type of marketing material raises all sorts of hairy questions under the Alternative Investment Fund Managers Directive (AIFMD). 

Fortunately, the LPs reach out to the GP first, allowing the non-authorized manager to send them marketing literature under a safe haven known as “reverse solicitation.” Acting on muscle memory and entrenched best practices, the private placement memorandum (PPM), pitch book or subscription agreements the GP sends include the common legal disclaimer that the marketing documents “do not constitute a public offering but are instead a private placement not subject to registration”, or something to that effect.

The compliance team may not know it, but this very scenario is the source of a brewing debate amongst private equity lawyers, many of whom question the logic of badging a pitch book or PPM as a private placement. If reverse solicitation means that no marketing took place – remember the LP is making contact first, without any prompt from the GP – then the “private placement” mention seems to contradict that.

What’s happening is that placement agents and local lawyers are telling their private equity clients (more specifically the general counsel or compliance officer) that the disclaimer is needed to avoid registering the securities under local law and/or cite marketing rules contained in the EU prospectus directive. CCOs taking that advice are then stuck between two legal opinions after consulting AIFMD legal specialists like KWM partner Greg Beechey who argue that “common sense dictates that if the private placement is not in fact a private placement, then the registration question disappears.”

Compliance officers are a careful bunch, meaning any deviation from normal practice – like using prominent legends and other disclosures in the PPM – can take them out of their comfort zone. But in this instance it appears a new best practice is warranted. Imagine explaining to the FCA that the fund is exempt from AIFMD reporting requirements and other rules, only to lose your train of thought as the regulator lands his finger on the part of your prospectus explicitly defining it a private placement.

Whatever the legal defense, the language here is less important than real-world action. If you’re not marketing in Germany, then no need to include the usual country disclaimer that the offering constitutes a German private placement. The switch in practice may feel uncomfortable, but way more uncomfortable would be twisting yourself into a pretzel trying to explain a contradiction.