An EU proposal to ease barriers to the distribution of alternatives funds across Europe could result in a deterioration rather than an improvement in the ability of managers to raise funds across the EU, according to legal experts.
Designed to eliminate regulatory barriers to the cross-border distribution of funds, the attempt to harmonize “pre-marketing” has come under fire for being overly restrictive and allowing GPs to discuss a new fund with LPs only after the fund has obtained AIFMD approval.
In a note on the proposals, law firm Reed Smith says the description of pre-marketing used in the proposals “would clearly prevent any marketing taking place after a fund is formed, even if it is only in a preliminary format. It would also clearly outlaw the practice currently carried on in a number of member states…which allows pre-marketing to include discussion and negotiation of draft documents provided that they are clearly only draft.”
Should the proposals be adopted as they are currently written, Reed Smith says the new approach would “effectively change the definition of marketing by the back door and require full documentation to be approved in advance by the regulators.”
Alongside the definition of pre-marketing, the proposals also set out conditions under which pre-marketing can occur. Currently seen as restrictive, lawyers say there could be a relatively simple fix to one of the problematic conditions. “The ‘pre-marketing conditions’ require that any information provided to professional investors must not contain ‘reference to an established AIF.’ Since you cannot in practice pre-market a closed-ended fund without referring to the manager’s track record, it would be useful if there were a confirmation that inclusion of performance data for prior funds which are not currently available for subscription (ideally), or (alternatively) inclusion of a generalized track record, would be permitted,” says Emily Harmsworth at Linklaters. “The pre-marketing conditions as proposed would be more limited than current market practice in the UK.”
Lawyers at Cleary Gottlieb say the proposed approach “is unhelpfully narrow.” The firm says the rules would “remove outright” the “valuable flexibility” to test investor interest in a fund before committing to a marketing notification. It says this removal “would prove even more challenging in those jurisdictions that have long waiting periods for regulatory approval,” such as those from outside the European Economic Area.
The European Commission may need to re-examine the concept of pre-marketing if the proposals are to realize their stated goals. Reed Smith: “As they stand, the proposals seem likely to worsen, rather than improve, the prospects for EU alternative investment fundraising.”