Your AIFMD compliance roadmap

Confused about what it now takes to market a private fund in Europe? You’re not alone.

As reported in the December edition of PE Manager, private fund advisors are assessing the EU landscape on a daily basis; and their marketing, IR, legal and compliance teams often encounter uncertainty about what the Alternative Investment Fund Managers Directive (AIFMD) means in different jurisdictions.

The directive technically went into effect in July, but many EU states are still in the process of implementing the regulation into national law and/or offered GPs subject to the directive a one year compliance grace period. And until more details around the directive are finalized, many GPs tell us they remain in a “wait-and-see” mode before mapping out a EU fundraising strategy for successor funds. Smaller managers – or those without many European LPs – are particularly likely to fall into this camp.

Indeed, some said as much on stage during a recent summit hosted by the British Venture Capital Association. That’s somewhat surprising, given that so many GPs are keen to expand their universe of LPs in this difficult fundraising environment.

The sentiment is understandable. The introduction of AIFMD has caused individual EU states to examine their existing private placement regimes, which non-EU managers must continue using until at least 2015 (the time when a marketing passport will be made available to them). As a result, the directive has raised concerns that some EU states will tighten their private placement rules to match certain elements of the AIFMD – or even go beyond it, which is being described as “gold plating” the directive in industry circles.

Non-EU fund managers marketing in Europe may be able to bypass the AIFMD by accepting commitments from investors who are actually the ones to initiate contact about a fund opportunity. Some legal experts believe that marketing via this route, known as reverse solicitation, will be common with fund managers outside of the EU. However, the strategy remains untested and not all countries have provided clear guidance on the matter.

But that’s not to say some guidance isn’t available. Recently, the European Private Equity and Venture Capital Association (EVCA) tapped into its network of industry experts and utilized its relationships with counterpart trade bodies at the national level to offer the most up to date guidance on all things AIFMD. With that research, some of the industry’s burning AIFMD-related questions are answered below in eight of the most important EU jurisdictions for fundraising:

Germany

What is marketing?

Germany’s securities regulator, BaFin, interprets marketing to be the act of making available fully negotiated fund documents to investors in Germany.
EVCA’s research says marketing therefore does not commence before a PPM or LPA is available in almost final form. But once these documents are in final form, marketing would be sending fund documents to the investor; and/or sending the investor the PPM, LPA, presentation or flyer on the fund if the subscription documents are available upon the investor’s request.

Is reverse solicitation available?

With regard to professional and semi-professional investors, it will not be considered marketing if the investor (or a third party agent of the investor) approaches the fund manager at its sole initiative. The exact scope of this reverse solicitation concept is still unclear however.

Will its private placement regime be ‘gold-plated’?

Germany requires a depositary to carry out the following functions:
monitoring of fund cash flows;
Safe-keeping of custody assets/verification and record keeping of other assets;
Certain general oversight functions (e.g. including oversight of subscriptions and redemptions, valuation, compliance by the fund with local laws and fund terms).

Other areas of gold-plating in Germany cover marketing to semi-professional investors. If marketing to semi-professional investors, the fund and the manager must fully comply with the AIFMD. Semi-professional investors may comprise, amongst others:

Directors and certain employees of the manager of the alternative investment fund (AIF);
Investors that have a minimum commitment to the fund of €10 million
Investors that have a minimum commitment to the fund of €200,000 who confirm they are sufficiently qualified to invest in the fund and are assessed by the fund manager (through a questionnaire) as being so.

UK

What is marketing?

An offering or placement takes place when a person seeks to raise capital by making an interest in a fund available for purchase by a potential investor, according to the UK securities regulator, the Financial Conduct Authority.

This includes situations where the LP is ready to sign up to the fund, and situations where an investor is invited to subscribe to the fund. In the FCA’s opinion, secondary trading is not marketing because it does not involve capital raising in an AIF.

Communication in relation to draft documentation (in other words the negotiation of the LPA) is generally not considered marketing, but this should not be a means to avoidance. In a private equity context, marketing usually means circulating the final form PPM plus limited partnership agreement and subscription documents.

Is reverse solicitation available?

The FCA has given guidance confirming that if a LP signs a form saying the fund commitment was born out of their own initiative, that meets the definition of reverse solicitation. However, the LP will have to sign this form before the commitment is actually made. Managers should also not be able to rely upon such confirmation if this has been obtained to circumvent the requirements of the directive, the FCA said.

Will the private placement regime be ‘gold-plated’?

Yes, the current UK financial promotion regime – which prevents the solicitation of capital during the course of business for unauthorized firms – will remain in force. In theory, this further restricts who a GP can market to. In summary, this means it is only lawful to market a private equity fund by addressing it specifically to a person who falls within an exempt category. But most of private equity’s main sources of capital (banks, insurers, fund of funds managers, large companies, pension funds with gross assets of £10 million or more, and a few other entities) remain out of the regime’s scope.

France

What is marketing?

The French transposition texts are not clear. The industry is still waiting for the French regulator to provide guidance on its interpretation of the AIFMD.
But what is clear is that fund managers must notify the Autorité des Marchés Financiers (AMF) before marketing any fund in France. However, details of the required notification (including timing, format and content) are not yet available and the regulator has set no clear timeline.

In addition, fund managers must appoint a custodian to undertake cash flow monitoring, custody of assets and verify compliance with certain operations (including for example asset valuations). The fund manager must also inform French regulators the custodian’s identity for overview purposes.

Furthermore, the fund manager’s home country, as well as the country the fund is domiciled in, must not be listed as non-cooperative by the Financial Action Task Force. At present, that rules out popular offshore private equity domiciles including: Bermuda and the British Virgin Islands.

Is reverse solicitation available?

Reverse solicitation may be relied upon. However, the French regulator has not provided any guidance on reverse solicitation in relation to the AIFMD.

But more generally speaking for the financial sector, the passive marketing exception in French law requires an express request from the investor for a specific fund without any product advertising or solicitation.

Will the private placement regime be ‘gold-plated’?

There is some gold-plating. Non-EU fund managers must comply with the French code monétaire et financier (CMF), as well as with French laws and regulations applicable to portfolio management companies. The scope of these provisions is potentially very large. The industry is waiting for a position from the French regulator to further define the scope of these provisions.

Denmark

What is marketing?

According to Danish regulator Finanstilsynet, marketing only occurs once the fund has been established. However, it remains unclear when Danish regulators consider a fund “established”. It’s also worth noting that Finanstilsynet considers marketing to take place even if only one investor is targeted by the fund manager in Denmark.

Is reverse solicitation available?

Under the Danish law implementing the directive marketing does not include placement made at the initiative of the investor. The Danish regulator has not given guidance on how it is demonstrated that a placement was made at the initiative of the investor.

Will the private placement regime be ‘gold-plated’?

The Danish regulator has introduced a requirement that the fund manager appoints one or more entities to carry out depositary-lite functions – cash monitoring, safekeeping of assets and oversight and asset verification duties. Non-EU managers must also ensure the publication of information and documents that the non-EU fund is required to publish in its home country is also made available to the Danish regulator.

Sweden

What is marketing?

Swedish authorities have taken a broad interpretation of marketing, defining it as both direct and indirect offerings. This includes all sale promoting actions (i.e. advertising, telemarketing, brochures, flyers, e-mails and investor events).
However, Swedish regulators have taken the view that marketing is not possible until the fund actually exists. In relation to launching a private equity fund, it is argued that the fund vehicle would meet the definition of a fund at the earliest by first closing.

Is reverse solicitation available?

While there are no clear rules as to what would be considered reverse solicitation in Sweden, legal experts highlight a few situations that typically would not constitute marketing:
If an investor on its own initiative contacts the fund manager,
Or if an investor contacts a GP to find funds
In order for the activities to be deemed taken at the investor’s own initiative, neither the fund manager nor any other party (e.g. a placement agent) may make first contact with the Swedish investor.

Will the private placement regime be ‘gold-plated’?

Sweden has largely adopted a “copy-out approach”, with no significant gold-plating.

Luxembourg

What is marketing?

Luxembourg’s AIFMD law defines the concept of marketing as any direct or indirect offering at the initiative of the fund manager or on behalf of the fund manager.

Is reverse solicitation available?

The concept of reverse solicitation is currently not addressed by the supervisory authority. Formal guidance on the issue is not expected from the Luxembourg securities regulator.

Will the private placement regime be ‘gold-plated’?

The Luxembourg rules do not show any signs of gold-plating, according to the EVCA’s research.

Finland

What is marketing?

For an activity to be qualified as marketing in Finland, it must be made at the initiative of the fund manager (or on its behalf) and include the offering of a fund to conclude a binding contract/commitment.

Is reverse solicitation available?

Finnish investors can contact a foreign fund manager or placement agent to express their interest to invest in a specific fund and this is not considered as offering fund interests in Finland. However it is not entirely clear how a fund manager could demonstrate to regulators that an investor initiated contact. GPs can also provide generalist information on their firm, but providing investment recommendations or negotiating draft agreements without the prior request of the investor would be considered marketing.

Will the private placement regime be ‘gold-plated’?

The Finland regime will not be excessively gold-plated, however, non-EU funds may not be marketed to non-professional investors, a qualification EVCA’s research says is unlikely to effect the private equity industry much.

Austria

What is marketing?

In EVCA’s view, the definition of marketing in Austria generally coincides with the country’s private placement rules that GPs have historically used.
Is reverse solicitation available?

Austria’s implementation of the AIFMD did not provide for a special regime regarding passive marketing.

Will the private placement regime be ‘gold-plated’?

Yes. In order for non-EU fund managers to market in Austria, the fund would have to feature a permanent representative in Austria and provide details regarding depositary, fund strategy and payment of fees. Marketing cannot occur without the approval from the Austrian Financial Market Authority.

EVCA’s research can be downloaded in full at:
www.evca.eu/publications/EVCA_AIFMD_Marketing.pdf