AIFMD. Love it or loathe it – and let’s face it, it’s not the most popular law – the Alternative Investment Fund Managers Directive (AIFMD) has changed the way that alternative funds are marketed to investors in Europe.
Ultimately this will hopefully allow European and non-European alternative investment funds (AIFs) to be marketed to professional investors in Europe by way of a passport, similar to the way that UCITS funds can be passported round Europe. For now, though, the passport only works for European AIFs marketed by European managers, with non-European AIFs and managers waiting for the European Securities and Markets Authority (ESMA)’s further recommendations on extending the passport to non-European jurisdictions. Your typical Cayman or BVI investment fund isn’t capable of being passported yet and so needs to be marketed using the AIFMD private placement regimes in each country.
So how do the AIFMD rules work for Cayman and BVI AIFs being marketed to professional investors in Europe by non-European managers?
It all comes down to Article 42 of the Directive and, in short, very much depends on where the professional investors are who you want to market to. Article 42 allows active marketing of non-European AIFs by non-European managers as long as the AIFs have been registered in the relevant country where they’re being marketed. This may sound straightforward but different jurisdictions have different requirements when it comes to registration. Some jurisdictions, like the UK and the Netherlands, just require a notification to the regulator that you’re going to be marketing the AIFs and once all the documents have been filed with the regulator you can start marketing. Others, like Denmark and Germany, have an approval process so that no marketing can take place until you’ve got your approval back from the regulator.
The Article 42 process involves including specific pre-investment disclosures in the offering document (or a wrapper) and ongoing reporting obligations (so-called Annex IV reports), as well as complying with certain private equity rules, and checking that there are co-operation agreements in place between the relevant EU jurisdiction and the supervisory authorities of the AIF and the manager. It’s also important to remember that we’re talking about marketing in countries in the European Economic Area (the EEA), which includes all the European Union jurisdictions plus Norway, Liechtenstein and Iceland but not Switzerland, which has its own set of private placement rules.
When you’re looking to market your fund within the EEA you also need to bear in mind that what’s classed as “marketing” in one jurisdiction may not be in another, so that one type of communication in one country would mean you have to register your AIF with the local regulator in order to market, but the same communication elsewhere may not. Sending investors an offering document and subscription agreement is typically going to be “marketing” in most jurisdictions but for other communications like newsletters, factsheets or websites, it depends on the country. Managers therefore have to look in detail at where their investors are, what marketing they want to do in those jurisdictions and whether that means they have to register the AIFs they’re marketing in each relevant jurisdiction under the Article 42 process there. We’re finding that managers often identify a few key jurisdictions where they register the relevant AIF under Article 42 so that they can market to investors there, and then do not market to investors in other EEA jurisdictions.
If an investor approaches a manager on its own initiative to ask for details of an AIF that it’s interested in investing in, this is expressly not caught by the marketing provisions of the Directive (referred to as reverse solicitation). Unfortunately, different jurisdictions have interpreted what is or isn’t reverse solicitation in different ways, meaning that managers are often advised not to try to rely on reverse solicitation as part of a European marketing strategy. Despite this advice, some managers, in particular in the US, have been taking a fairly bullish approach in practice when it comes to relying on reverse solicitation from investors, at least for the time being.
Some good news, though, is that ESMA is now reviewing its second batch of non-European jurisdictions to decide whether the passport should be extended to AIFs and managers based there. This second batch includes the Cayman Islands and Bermuda (hurray) but not as yet the British Virgin Islands (we’re hopeful the BVI will be in the third batch…). ESMA is due to complete its assessment of these jurisdictions by 30 June 2016 although the passport could still be a way off yet as they’ve rightly decided not to recommend extending the passport to just a couple of jurisdictions in a vacuum as it would risk distorting the market and encouraging jurisdictional arbitrage.
Under the Directive, the Article 42 national private placement regimes will be available until at least July 2018. ESMA still has plenty of work to do in reviewing the remaining non-EU jurisdictions identified to decide whether or not to extend the passport to them, reporting again on how the private placement regimes and passport are working when they’ve been in place for a while longer, and working out the detail of how the passport would work with non-European countries. For these reasons, we suspect the national private placement regimes may have a good few years left in them yet...