On August 2, 2021, a new pre-marketing regime for alternative investment funds (FIA) promoted and distributed in Germany will enter into force with the Fund Domicile Act1 make changes to the German capital investment code.2
New rules implement European Directive (EU) 2019/11603 on cross-border distribution of undertakings for collective investment in German law, and they are relevant for European and non-European asset managers who promote and distribute AIFs in Germany. In this OnPoint, we describe these new marketing regulations and outline some scenarios and practical issues.
Pre-marketing of AIFs – What is changing?
Under the current regime, the German regulator BaFin has provided guidance on what constitutes “pre-marketing” of AIFs as opposed to “marketing”.
To be considered as marketing, offering or investment activities, they must currently relate to: (i) an existing investment fund; or (ii) an investment fund that is at least ready to be offered (for example, models of investment conditions that still contain loopholes, or other aspects that need to be negotiated are generally not considered to be “Marketing”). In addition, according to BaFin guidelines, as a general rule, when an investment fund operates under a specific name, this indicates that the fund is already established or ready to be offered (although this presumption can be rebutted). In addition, when institutional investors are actively involved in structuring the fund in certain situations, marketing does not take place.
As a result, some flexibility was provided, as all activities that did not fall under the definition of “marketing” by missing the qualifying aspects to be considered “marketing” according to BaFin guidelines, were not subject to an obligation to notify or register with BaFin. .
The Fund Domicile Act implements a new regime by adopting the European definition and the pre-marketing rules in German law. Pre-marketing is defined as:
- A direct or indirect provision of information or communication on investment strategies or concepts;
- By or on behalf of an alternative investment fund manager (AIFM);
- Potential professional or semi-professional investors domiciled or having their registered office in Germany, or professional investors domiciled or having their registered office in an EU / EEA Member State;
- With the intention of determining their interest in an AIF or a sub-fund thereof not yet constituted, or constituted but not registered for marketing purposes;
- Without, in each case, constituting an offer or a placement of units or shares of the AIF or the sub-fund.
The introduction of the new pre-market rules adds a layer of regulation to the German regime. While any pre-marketing under the pre-existing regime was “unregulated”, if conducted in accordance with BaFin guidelines, the new regime will require compliance with defined rules.
The new pre-marketing and marketing distinction
The new pre-marketing arrangements distinguish between pre-marketing and marketing activities using the following three criteria. Activities are considered to be pre-market (rather than commercialization) if the information provided to future professional and semi-professional investors:
- is not sufficient to allow investors to commit to subscribe for units or shares of a particular AIF;
- Does not include subscription forms or comparable documents, whether in draft or final form; or
- Does not include constating documents, prospectuses or offering documents of an AIF not yet authorized in its final form.
In addition, to be considered as pre-marketing, in cases where the manager provides draft prospectuses or offering documents, these documents must not contain information that could be considered sufficient for investors to make a decision to investment and must clearly indicate that:
- It does not constitute an offer or an invitation to subscribe for units or shares of an AIF; and
- The information presented there should not be relied upon as it is incomplete and subject to change.
If these requirements cannot be met, the activities are considered to be marketing and the AIF must be registered for marketing in Germany.
The new rules provide no further guidance on what “enough for investors to make an investment decision” really means and how this requirement applies to things like terms sheets, slides, etc.
Obligations of EU AIFMs under the pre-marketing regime
Any EU AIFM must ensure that the pre-commercialization of AIFs in Germany is appropriately documented, and within two weeks of the start of pre-commercialization activities, the EU AIFMs must notify BaFin through the ISA’s home state regulator. The same applies to German AIFMs, which must notify BaFin of any pre-marketing activity of AIFs and request that the notification be forwarded to regulators in EU countries in which the German AIFM carries out pre-marketing activities. marketing.
Pre-marketing activities can only be carried out by the AIFM and certain third parties on behalf of the AIFM such as other AIFMs, UCITS ManCos, MiFID companies, banks as well as tied agents.
AIFM outside the EU
Is pre-market registration also possible for non-European AIFMs?
Non-European AIFMs can carry out their pre-marketing activities in Germany, but from 2 August 2021 they must also register them with BaFin. The German legislator has put in place a mandatory notification procedure for non-EU AIFMs with regard to pre-marketing. There is no clear legal basis in Directive (EU) 2019/1160 other than recital 12, which states that “The national laws, regulations and administrative provisions necessary to comply with Directive 2011/61 / EU and, in particular, with the harmonized rules on pre-marketing, should in no way put EU AIFMs at a disadvantage compared to AIFMs. third country.. “The requirement for managers of non-EU AIFs to register for pre-marketing in Germany could be seen as a form of ‘gold-plating’ – on the other hand, it allows managers of AIFs to non-EU to make any pre-marketing activity in Germany at all. Otherwise, they would be limited to either mandatorily register their AIFs for marketing prior to rendering activities or would have to rely strictly on reverse solicitation.
Consequently, non-European AIFMs must also notify BaFin of the start of pre-marketing of AIFs in Germany within two weeks and provide the following information:
- The periods during which pre-marketing takes place or has taken place;
- A brief description of the pre-marketing, including information on the investment strategies presented; and
- Where applicable, a list of AIFs and AIF compartments which are or have been pre-marketed.
Effects on reverse stress
The explanatory memorandum to the Fund Domicile Act explicitly states that the notion of reverse solicitation remains available and is not replaced or removed by the pre-marketing rules in general. Thus, when an investment in an AIF is based solely on the initiative of the investor, neither the marketing nor pre-marketing rules apply. Furthermore, when a manager meets potential investors and simply promotes his expertise and general abilities as a manager, this does not preclude a reverse solicitation being available for a specific fund.
However, any investment made in an AIF within 18 months of the start of its pre-marketing is deemed to be the result of marketing activity, which means that the AIF must be registered for marketing with BaFin before to accept any investor. However, the wording of the Fund Domicile Act is not entirely clear on this point and creates uncertainties. He is pointing out that :
- The management company of the manager must ensure that investors do not acquire units or shares of an AIF through pre-marketing; and
- That investors, contacted within the framework of the pre-marketing, must acquire units or shares of this AIF exclusively within the framework of the marketing authorized by the German Capital Investment Code. This means after registration of the AIF for marketing with BaFin.
- An investment by professional or semi-professional investors within the first 18 months after the manager has started the pre-marketing of units or shares of an AIF mentioned in the information provided in the pre-marketing, or of a AIF registered for pre-marketing-marketing purposes, will be deemed to be the result of marketing activity, and the AIF must be registered for marketing with BaFin before accepting the investor.
- The manager must appropriately document any pre-marketing.
In this context, the question arises as to whether the 18-month restriction is limited to the group of investors that the manager or his agent has contacted during the pre-marketing activities, or to all future investors, including those who made the investment on their own. initiative.
As discussed above, the explanatory memorandum to the Fund Domicile Act makes it clear that the concept of reverse solicitation remains available and is not replaced or removed by the pre-market rules. In any event, it seems advisable to carefully and adequately document any pre-market activity.
The updated pre-market rules for EU managers offer a harmonized approach across Europe instead of the divergent treatment of pre-market in different national legal systems. Germany, however, already had an effective method of distinguishing marketing from pre-marketing – or better, non-marketing. European and non-European fund managers will therefore have to adapt to the new rules. It remains to be seen how the new regime will work in practice and whether BaFin will provide more guidance.
1) Full title of the German act: Gesetz zur Stärkung des Fondsstandorts Deutschland und zur Umsetzung der Richtlinie (EU) 2019/1160 zur Änderung der Richtlinien 2009/65 / EG und 2011/61 / EU im Hinblick auf den grenzüberschreitenden Vertrieb von Organismen für gemeinsame Anlagen (Fondsstandortgesetz – FoStoG)
2) Kapitalanlagegesetzbuch – KAGB
3) Directive (EU) 2019/1160 of the European Parliament and of the Council of 20 June 2019 amending Directives 2009/65 / EC and 2011/61 / EU as regards the cross-border distribution of undertakings for collective investment.