[co-author: Michelle Nierhaus]
On 28 May 2021, the German Legislator adopted new and stricter regulations on Alternative Investment Funds pre-marketing. These regulations will go into effect in August as an implementation of the Directive (EU) 2019/1160 on cross-border distribution of collective undertakings (Cross border distribution directive, the Directive) in the German Capital Investment Code (Kapitalanlagegesetz, KAGB).
With these new regulations comes a host of questions; how will this change the practices of AIF managers advisors and investors and what are German deviations from the European legal framework? We have compiled some answers for you.
STATUS QUO
According to the current legal situation, which is essentially characterized by the administrative practice of the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin pre-marketing of funds was not seen as an area of concern and had fewer regulations. Marketing subject to notification required that the investment fund had already been launched or at least that a contract was ready to be offered without any gaps that still had to be negotiated, but any "pre"-marketing before this remained unregulated.
THE NEW REGULATIONS
This situation, especially BaFin's practice, is likely to change considerably through the new regulations. Here are the main points:
- Pre-marketing – Definition and Scope
The new regulations introduce a definition of pre-marketing, that is essentially consistent with the definition provided by the Directive. According to that:
“pre-Marketing is the provision, directly or indirectly, by or on behalf of an AIF management company, of information or communication about investment strategies or investment concepts to potential professional and semi-professional investors domiciled or having their registered office within the scope of this Act or to professional investors residing or having their registered office in a Member State of the European Union or another Contracting State to the Agreement on the European Economic Area with the aim of determining the extent to which the investors are interested in an AIF or a sub-investment fund which is not yet or is authorized but has not yet been the subject of a marketing notification, in a state, where potential investors are domiciled or have their registered office, provided that in no event shall this constitute an offer to or a placement with the prospective potential investor to invest in the units or shares of such AIF or sub-investment fund.”
One specific German deviation from the Directive concerns the inclusion of semi-professional investors in the definition. Furthermore the regulation's definition include non-EEA-alternative investment managers (AIFMs). Although the definition in the Directive does not explicitly encompass non-EEA-AIFMs their inclusion in the German regulation is deemed in line with the objective of the directive, that EU-AIFMs should not be discriminated by the national regulations and administrative provisions transposing the harmonised rules on pre-marketing against non-EU-AIFMs (cf. recital 12 of the Directive).
It is also noteworthy, that the explanatory notes to the draft bill confirm the current administrative practice of BaFin, according to which the mere advertising of the AIFs general capabilities is to be considered separately from advertising for a specific investment fund and therefore should not qualify as (pre)marketing (cf. explanatory note p. 91).
- Limitations to pre-marketing
The limitations on the information that may be provided in the context of pre-marketing meet the Directive almost word-for-word, again with the exception of the inclusion of semi-professional investors and non-EU-AIFMs (see above). That means an AIF management company may engage in pre-marketing, except where the information provided to prospective professional and semi-professional investors is:
1. Sufficient to enable investors to commit to purchasing units or shares of a particular AIF;
2. Subscription forms or comparable documents, whether they are in a draft or in final form; or
3. Constituent documents, prospectuses or offering documents of an AIF not yet authorized in final form;
If draft prospectuses or offering documents are provided, they shall not contain information sufficient for investors to make an investment decision and shall clearly state that:
1. It does not constitute an offer or an invitation to subscribe for units or shares of an AIF; and
2. The information presented therein should not be relied upon as it is incomplete and subject to change.
- Application of marketing rules
As to application of the marketing rules the new German regulations state in perfect accordance with the Directive:
“The AIF management company shall ensure that investors do not acquire units or shares of an AIF through pre-marketing and that investors contacted in the course of pre-marketing acquire units or shares of that AIF exclusively within the scope of the marketing authorized under this Act [the KAGB]. A subscription made by professional or semi-professional investors within 18 months after the AIF management company has commenced pre-marketing of units or shares of an AIF referred to in the information provided as part of the pre-marketing or of an AIF registered as a result of the pre-marketing shall be deemed to be the result of marketing and shall be subject to the notification procedures applicable under this Act. The AIF management company shall ensure, that the pre-marketing is adequately documented.”
Here we have reached a sticking point of the new regulation. The statutory fiction, stipulating in essence, that all subscriptions within 18 months after the AIFM company has commenced pre-marketing shall be deemed to be the result of marketing and shall therefore be subject to notification. This necessitates a substantial change as to BaFin’s current administrative practice, whereby notification procedures are not triggered in the phase of the pre-marketing. Under the new regulations that go in effect as of 2 August 2021, the furnishing of a draft prospectus and investment terms template is deemed to qualify as premarketing which triggers the statutory fiction of pre-marketing for the period of 18 months.
- Pre-marketing notification obligation ("German gold-plating")
Beyond the requirements of the Directive, the new German implementation regulations provide for a mandatory notification procedure for non-EU-AIFM. These, like EU-AIFMs, have to notify the BaFin of the commencement of pre-marketing within the scope of the draft bill within two weeks and provide the following information:
1. The periods during which the pre-marketing is taking or has taken place;
2. A brief description of the pre-marketing including information on the investment strategies presented; and
3. Where relevant, a list of the AIFs and compartments of AIFs which are or were the subject of pre-marketing.
Unlike for EU-AIFM, the new regulations do not provide for a pre-marketing passport and mutual information exchange procedure between supervisory authorities for pre-marketing of non-EU-AIFMs within the EU.
- Effects on reverse solicitation
The explanatory notes to the draft bill state, that “it follows from the definition [of pre-marketing] that pre-marketing originates from the management company or on its behalf. If the initiative to acquire of units of a fund comes from the potential investor (reverse solicitation), it is neither distribution nor pre-marketing.” (explanatory note p. 91). Nevertheless, there is a potential friction between the above mentioned statutory fiction and reverse solicitation. In the light of a textual interpretation the provision could mean, that no reverse solicitation is possible during the 18-month period. However, in view of the passive freedom to provide services, it seems more convincing to limit the statutory fiction of pre-marketing to investors, to whom the AIF was in fact pre-marketed and to permit reverse solicitation with regard to investors, who were not contacted in the course of the pre-marketing.
TO DO'S
The potential impact on reverse solicitation has been criticized in several comments by industry associations submitted to the legislator in the course of the legislative process. These comments have not yet been heard.
Consequently, AIFMs and placement agents must be aware of the new rules (especially the filing obligation) and comply as of August 2021.
