Pack more than a passport

For all its compliance hassle, the Alternative Investment Fund Managers Directive (AIFMD) promised authorized fund managers a seamless marketing experience across the European Union. But the directive also gave individual countries the discretion to “gold plate’ their regimes, which has led to a myriad of additional regulations and fees beyond those required for an AIFMD marketing passport.

Broadly, fund managers appreciate the purpose of additional fees in each jurisdiction. “The fees aren’t controversial, because the regulators are earning them by processing the various applications,” says Melville Rodrigues of the law firm CMS. But many GPs were under the impression that once they applied for the passport in their home country, they wouldn’t have additional duties or fees in the host countries, only to discover that’s not the case.

“EU managers apply for their AIFMD passport through their domestic regulator, but that means they don’t have direct contact with the regulators in those host EU countries that impose additional requirements, which can lead to some surprises during the process,” says Owen Lysak, of the law firm Clifford Chance. However, most lawyers agree that the regulators are working well together and that having fewer regulatory contacts might be more efficient in the long run.

That’s not to say that there haven’t been real hiccups in implementing the AIFMD passport across the EU. Some countries have lagged in implementing the directive, including Spain for example, causing GPs to halt marketing in those jurisdictions for the moment.

For countries that have fully transposed the directive into local law, some have decided to add extra fees and bureaucratic hurdles, which made it harder to navigate given the nature of private equity fundraising. “It is a difficult decision to commit the fees and effort of marketing into that country without being able to gauge investor appetite there first,” says Mike Newell of the law firm Norton Rose Fulbright.

Some European countries like Germany have addressed this problem by allowing managers to share draft marketing materials prior to passport applications, as a way to drum up interest in a vehicle before the formal marketing process begins. But other countries like France don’t offer such latitude, demanding that the only marketing materials allowed are those that were submitted with the passport application.

As the EU reaches full implementation of AIFMD, fees and regulations are prone to change annually. For now, here’s the state of the additional fees and regulations required to make certain that passport is gold-plated across the entire European Union, along with the flexibility each country offers to pre-market. 

(Please note the following only concerns EU fund managers marketing to professional investors outside their home country)

France: Several lawyers and market participants have found France to be one of the toughest countries in which to use the AIFMD passport. For one, there’s the steep €2,000 annual marketing fee per AIF, which includes feeder funds, as the master/feeder structure is not recognized as a single vehicle. In addition, when applying for a passport in their home country, for that passport to be valid in France, the fund manager needs to include: a program of activity detailing the service or services that they wish to provide, and identifying the AIFs that they plan to manage; the organizational structure of the branch; and the standard statement indicating that their home state has authorized them under AIFMD.

But France might prove more welcoming in the future. When the country first transposed AIFMD, they required EU managers have a local facilitation agent attached to the passport application. The agent would need a French address where the local regulator can request documentation and the names and contact details of that branch’s directors. But last month, according to multiple market sources, French authorities dropped that requirement.

France does not allow for any pre-marketing efforts. Anything that constitutes publicity, canvassing or advice will be viewed as marketing. And before a fund manager gets any bright ideas about reverse solicitation, France also has one of the strictest policies governing that practice in the EU.

Germany: Germany recognizes the AIFMD passport without additional paperwork and the fees are relatively slight compared to France, with €772 due for each fund or sub-fund. Investor roadshows or the circulation of draft private placement memoranda would not constitute “marketing” if the drafts are still under negotiation and the AIF has no name and has yet to be launched. The drafts of the PPM that accompany the passport application will be the versions that can be used in earning formal commitments from investors.

Italy: There’s no additional paperwork here but there is the whopping €4,000 fee per fund and €1,700 fee per sub fund. Like France, there are strict guidelines as to what constitutes marketing, When Italy issued Decree 44, which brought the country’s Financial Act into line with AIFMD, the country didn’t define marketing, but lawyers expect marketing to include any promotional activity. Reverse solicitation may be more acceptable in Italy than France, provided it’s a truly independent solicitation by an Italian investor.

Spain: Spain’s fees are among the highest in the EU, with a €1,000 notification fee per fund, and annual fee of €3,000 per open-ended fund. Closed-ended funds have yet to be addressed, but lawyers expect a similar fee. In addition to the passport, the manager has to inform Spanish investors on payments made by the investors in any transactions executed (including a breakdown of fees and commissions paid); on their ability to acquire or redeem units in the AIF; and their rights as investors and exercise of those rights. Spain’s marketing rules are very strict, considering any communication with potential investors in order to promote, directly or through a third party, a fund. This includes phone calls, home visits, letters, emails or any electronic communication that may be seen as part of a marketing campaign.

Austria: If the manager has a passport, Austria doesn’t require any other paperwork. However, the regulator will charge a fee of €1,100 for processing the documents. If marketing umbrella funds, the fee will increase by €220 per sub-fund, which is calculated from the second sub-fund. In addition, Austria will charge an annual fee of €600 for monitoring compliance with the obligations arising from the country’s own alternative investment regulations. This fee will increase by €200 per sub-fund that will once more be calculated from the second sub-fund. Unlike Germany, Austria doesn’t allow any draft marketing materials to be distributed prior to the home country’s regulator notifying Austria of the manager’s intent to market there, with passport in hand.

Denmark: Denmark recognizes the passport without additional paperwork, but an annual fee of 2,000 kr per AIF and another 2,000 kr for every sub-fund. Denmark does allow for some pre-marketing efforts provided the AIF isn’t established yet and it’s not possible for any investors to commit to acquiring any shares or units of the fund. Furthermore, the AIFM cannot have prepared any private placement memorandum, prospectus or other such documents for the fund in question. There remains a great deal of ambiguity as to what constitutes “preparation” of these documents, according to legal sources.

Finland: For fund managers with an AIFMD passport, Finland only requires a €800 notification fee per fund and no additional paperwork. In terms of pre-marketing efforts, investor roadshows or “soft circling” efforts meant to gauge investor appetite are usually considered outside the marketing rule, provided the content of those roadshows or conversations stays generic in nature and does not offer a specific fund. However, distributing draft private placement memoranda is likely to be seen as marketing in Finland.

Croatia, Lithuania, Luxembourg, Malta and Romania: These countries all recognize the passport without extra paperwork, but charge a few additional fees. Croatian fees are fairly steep with a notification fee of roughly €2,900 for those with a passport. The regulator also charges a monthly supervisory fee that could vary from €1,800 to €4,000 per fund on an annual basis. Lithuanian notification fees are relatively slight for managers with passports, at €492 per fund.

Luxembourg’s regulator charges a flat fee for each non-Luxembourg AIF marketing within the country. AIFs with a single compartment will have to pay a lump sum of €2,650 and EEA AIFs with multiple compartments will have to pay a lump sum of €5,000. The Maltese regulator charges the same application/notification fees to EU and non-EU managers of €2,500 per AIF.

Romania only recently adopted AIFMD to local law, and charges 10,000 lei ($2524; €2225) for marketing the first fund, and 8,000 lei for the next nine sub funds, 6,000 lei for the next ten sub funds and so on, until it’s only 2,000 lei by the fortieth sub fund. There’s also an additional 6,000 lei supervisory fee for direct management of a fund by an outside EU manager, and a 10,000 lei fee if it’s managed through a local branch.

There has been no guidance in terms of pre-marketing in these jurisdictions, so lawyers suggest it’s best to wait until that passport is in hand to begin any promotional activity.

Belgium, Norway and Sweden: This trio recognizes the passport with no additional fees or paperwork, but managers should hesitate before commencing any pre-marketing efforts. Belgium makes no differentiation with regards to marketing efforts, so a passport is necessary to begin any sort of campaign. Norway makes it clear that both direct and indirect marketing is out of bounds, ruling out draft private placement memoranda, phone calls, emails, physical meetings/roadshows, etc. However, discussions with potential investors (and any accompanying promotional materials) that are generic in form and do not provide specific details in relation to an AIF may fall outside this definition. Likewise, Sweden allows for some generic marketing efforts.

The United Kingdom, Ireland, and the Netherlands: These countries all recognize the passport without extra requirements, impose no additional fees and are fairly liberal in defining pre-marketing materials, in line with Germany’s stance on allowing draft documents of the PPM.

Bulgaria, Cyprus, Czech Republic, Estonia, Greece, Latvia and Slovakia: These countries don’t impose any additional fees or bureaucratic requirements for AIFMD passport holders, but there’s little guidance on pre-marketing rules. For these jurisdictions, it’s suggested to wait before launching any promotional effort.

Poland, Portugal and Slovenia: These three countries have yet to transpose AIFMD into local law of yet, so there are no notification fees, but there is also no guidance as to what AIFMD will look like for managers in these countries or EU AIFs marketed to local LPs. However, according to EU law, a directive that has not been implemented by a member state by the deadline to do so, which was back in July of 2013, may nonetheless have a direct effect on that member state. So even as these three countries are in the process of adopting AIFMD, the directive may still apply where such provisions are considered to be unconditional and sufficiently clear and precise for such purpose. So basically it’s no surprise that some managers hesitate to market funds where AIFMD hasn’t been implemented yet.