Article Post on 12 July 2021

Directive on Cross-Border Distribution and Innovations for the Summer

This article also exists in French and German

_Current situation: As of August 2, 2021, a uniform understanding of the definition regarding pre-marketing shall come into force through the Directive (EU) 2019/1160 of the European Parliament and of the Council of June 20, 2019 amending Directives 2009/65/EC and 2011/61/EU as regards the cross-border marketing of collective investment undertakings ("2019 Directive") and the Regulation (EU) 2019/1156 of the European Parliament and of the Council of June 20, 2019 facilitating the cross-border marketing of collective investment undertakings ("2019 Regulation").

With respect to marketing of units or shares of an alternative investment fund ("AIF") in the EU by its alternative investment fund manager ("AIFM"), it is important to note that to date such is subject to the provisions of Chapter 6 of the Law of July, 12 2013 on alternative investment fund managers, as amended (the "2013 Law").

Under the 2013 Law, marketing is defined as "a direct or indirect offering or placement, at the initiative of the AIFM or on behalf of the AIFM, of units or shares of an AIF it manages, to or qith investors domiciled or with a registered office in the European Union."

Accordingly, it is generally the case that the AIFM undertakes the marketing of the units or shares of an AIF. According to the 2013 Act, neither the AIF itself, nor its management under company law and/or the initiator have the right to take over the marketing of the units or shares of the AIF. However, according to Article 1 (9) of the 2013 Law, the AIFM may delegate the function of marketing in parts, depending on the option / possibility chosen, to a third party, provided that such third party holds the necessary license in order to be able to market the units or the shares of the AIF. Under Luxembourg law, in order to be eligible for the marketing, a person must hold a license, pursuant to article 24-7 of the law of April, 5 1993 on the financial sector, as amended.

Further, the possibility of the so-called "reverse solicitation" exists under Luxembourg law. This possibility is not regulated by law, but is listed in the FAQs of the Luxembourg Financial Supervisory Authority ("CSSF") with regard to the 2013 Law ("FAQ") under item 21.I. Accordingly, for something to be considered as "reverse solicitation", two points must be established: (i) the potential investor approached the AIFM and / or the AIF and (ii) neither the AIF nor the AIFM had any prior contact with such investor. “Reverse solicitation” would thus not qualify as marketing in the above sense and consequently would not require any licenses. The burden of proof of a "reverse solicitation" lies with the AIFM. This can be proven, among other things, by the potential investor signing a letter confirming that he has approached the AIFM.

In addition, the concept behind the so-called pre-marketing has been of particular importance to date and is a much-used tool for "no marketing". It should be noted that various member states have not yet explicitly provided for the concept of pre-marketing and the associated requirements. This is also the case for Luxembourg until the implementation of the 2019 Directive.

Accordingly, Luxembourg law has not yet regulated whether, and if so to what extent, pre-marketing may be carried out and by whom.

The FAQs also do not provide any specific elaboration on the presentation of pre-marketing under Luxembourg law. However, item 21.B of the FAQs states that the submission of draft documents relating to an AIF managed by an AIFM to potential investors, does not constitute a marketing activity, unless the draft documents can be used by the potential investors to formally subscribe or commit to subscribe for units or shares of the AIF.

Thus, the legal framework around marketing or "no marketing" with pre-marketing has been quite favorable to date, in particular there is much room for interpretation.

> New provisions

The new provisions mainly introduce innovations in the area of pre-marketing. However, other issues are addressed under the Directive, such as the new provisions on the revocation of arrangements made for the marketing of units or shares of some or all EU AIF in Member States other than the home Member State of the AIFM. Furthermore, it is stated that an AIFM shall provide facilities in each Member State in which it intends to market units or shares of an AIF to retail investors which facilitate, inter alia, the handling of information on the exercise of investors' rights arising from investments in AIFs in the Member State in which the AIF is marketed.

While the 2019 Directive adapts other legal bases, which in turn require implementation in the respective national law, the Regulation is directly applicable in the member states.

Within the framework of the 2019 Directive, Directive 2011/61/EU of the European Parliament and of the Council of June 8, 2011 on alternative investment fund managers ("2011 Directive"), in particular, is then to be amended accordingly than it is to contain an explicit statement on pre-marketing henceforth.

Accordingly, pre-marketing is considered to be under the new definition under the 2011 Directive:

  • the provision by or on behalf of an EU AIFM, directly or indirectly, of information or communication on investment strategies or investment concepts to potential professional investors domiciled or having their registered office in the EU;
  • with a view to determining the extent of that interest in an AIF or a sub-fund which is either not yet registered or is registered but has not yet been the subject of a marketing notification pursuant to Article 31 or 32 in the Member State where the potential investors are domiciled or have their registered office;
  • provided that this shall in no case constitute an offer to or a placement with the potential investor to invest in the units of this AIF or sub-fund.

According to the amendments to be made to the 2011 Directive, a certain level of pre-marketing activities by (only) the AIFM regarding the structure to be set up is therefore allowed, as long as the following is complied with:

  • only the following persons shall be permitted to perform this activity under this policy:

    only certain third parties on behalf of an authorised AIFM, such as:
     
    • an investment firm as defined in Directive 2014/65/EU of the European Parliament and of the Council;
    • a credit institution as defined in Directive 2013/36/EU of the European Parliament and of the Council;
    • a UCITS management company within the meaning of Directive 2009/65/EC;
    • an AIFM within the meaning of this 2011 Directive; or
    • a tied agent within the meaning of Directive 2014/65/EU
       
  • the information provided to potential investors may not be sufficient to enable investors to make a firm commitment to purchase units in the AIF; and/or
  • no subscription forms or similar documents may be provided to potential investors (whether in draft or final form); and/or
  • potential investors may not be provided with the constitutional documents, the offering document or offering documents in final form for an AIF that has not yet been authorised;
  • must inform the CSSF thereof within two (2) weeks, by informal letter, on paper or electronically (the AIFM must indicate in which Member States it carries out or has carried out pre-marketing and during which periods the pre-marketing takes place or is intended to have taken place; the AIFM must also submit, if applicable, a list of the AIFs for which the pre-marketing has been carried out or is intended to be carried out); if the pre-marketing takes place in other Member States, the CSSF must inform the relevant supervisory authorities of the intention of the AIFM.

Furthermore, it should be noted that a subscription made by professional investors within eighteen (18) months after the start of pre-marketing by the AIFM, which is related to the pre-marketing activities carried out by the AIFM, must be considered as a marketing result and must be reported in accordance with the regulations under the 2011 Directive.

This also entails that within the eighteen (18) months, the professional investor cannot invoke the concept of “reverse solicitation” already mentioned above. It should be emphasised that this also applies to indirect pre-marketing.

The 2019 Directive speaks of pre-marketing to professional investors, but does not address the other types of investors, which raises the question of whether or not the new pre-marketing rules apply to these investors, such as semi-professional investors (in Germany) or retail investors. Furthermore, the 2019 Directive did not address non-EU AIFM, which may be an open issue in some Member States.

Under the 2019 regulation, points regarding marketing ads, transparency, fees, etc. are, amongst others, further addressed. The regulation was effective as from August 1, 2019, although some articles as well as paragraphs, will not come into force until August 2, 2021, such as the requirements for marketing advertisements.

> Luxembourg input

The 2019 Directive amending, among others, the 2011 Directive has found its expression for implementation in Luxembourg in the draft law number 7737 ("Draft Law"), which, however, has not yet been voted. Whether an implementation will take place by the deadline remains to be seen. Indeed, member states are required to transpose the Directive into national law by August 2, 2021.

The draft law basically adopts the regulations 1:1. Questions around non-professional investors still remain open; but it is clarified that the 2019 Directive shall also apply to non-EU AIFM.

> Outcome

The new regulations and in particular the associated definition of the term pre-marketing are a clarification for the marketing sector, as this fills the void that previously prevailed in this area. Now, however, the leeway around pre-marketing is eroded and filled with clear rules of the game, which unfortunately leaves the non-AIFM player out in the cold. Specifically, this means; the deadline of August 2, 2021 should be exploited for sales purposes, otherwise there is an obligation for non-regulated players to regulate in the event of a sale. However, it remains to be seen how Luxembourg will deal with pre-marketing from August onwards (because the Draft Law has not yet been voted and the directive will be, in our opinion, directly applicable from then on).

Our attorneys specialising in fund-specific issues will be happy to assist you with any questions you may have on the subject at any time.
 

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