In less than one year, new rules to regulate the pre-marketing of alternative investment funds (AIFs) such as private equity, debt, infrastructure and hedge funds are set to come into force. The changes are set to have a particular impact on non-EU fund managers. As of August 2, 2021, these rules will need to be considered before any fund launches. It is imperative that AIFMs familiarise themselves with the changes.
The Alternative Investment Fund Managers Directive (AIFMD) does not currently regulate pre-marketing. An AIFM wishing to test investor appetite for a particular investment idea or investment strategy is, therefore, faced with diverging treatment of pre-marketing in different jurisdictions.
Across the EU, the position varies considerably. Generally, there is little guidance, so the decision to pre-market is a risk-based judgment. To address those divergences, the new rules provide a harmonised definition of pre-marketing and the conditions under which an AIFM can engage in pre-marketing.
Under the new rules, pre-marketing must be addressed to potential professional investors and must be intended to test such investors’ interest in the relevant AIF. Accordingly, during the course of pre-marketing, it will not be possible for investors to subscribe to an AIF and the distribution of subscription forms or similar documents will no longer be permitted.
To ensure local regulators can exercise control, an AIFM must send, within two weeks of having begun pre-marketing, an informal letter to the relevant regulator, specifying in which member states it is engaged in pre-marketing, the periods during which the pre-marketing is taking place and a list of the AIFs that are the subject of the pre-marketing. This introduces an additional administrative burden on AIFMs which, in particular, non-EU AIFMs will not be familiar with and which should be factored into the planning of any new fund launch.
Importantly, the new rules provide that member states may not implement rules which in any way disadvantage EU AIFMs vis-à-vis non-EU AIFMs. Non-EU AIFMs are likely to find the new rules extremely limiting in particular, given that there is a risk that the rules applying to them in local markets could be even more restrictive.
The biggest impact on non-EU AIFMs is likely to be around reverse solicitation, which they have historically relied on to sell their funds in the EU. Any subscription within 18 months of the AIFM having begun pre-marketing will be considered to be the result of marketing and will be subject to the applicable notification procedures referred to in AIFMD. This means reliance on reverse solicitation will no longer be possible.
Any AIFM currently planning to close a fund after the new rules comes into force must take them into account. For non-EU AIFMs, including, potentially, UK AIFMs following the UK’s exit from the EU, there will be significant access hurdles to the EU market which will need to be navigated. In particular, the rules regarding notification of pre-marketing activity and restricting use of reverse solicitation should be looked at very carefully by all non-EU AIFMs.
Stefanie Sahla-Jones is principal associate, financial institutions, at Evershed Sutherland
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