New Pre-marketing Rules for Alternative Investment Funds in Germany
On August 2, 2021, a new pre-marketing regime for alternative investment funds (AIFs) promoted and distributed in Germany will come into force with the Fund Domicile Act1 making changes to the German Capital Investment Code.2
The new rules implement EU Directive (EU) 2019/11603 on the Cross-Border Distribution of Collective Investment Undertakings into German law, and they are relevant for EU and non-EU asset managers that promote and distribute AIFs in Germany. In this OnPoint, we outline these new marketing regulations and describe some practical scenarios and questions.
Pre-Marketing of AIFs – What is Changing?
Under the current regime, the German regulator BaFin provided some guidance as to what constitutes “pre-marketing” of AIFs as opposed to “marketing”.
To be deemed marketing, offering or placement activities must currently relate to: (i) an existing investment fund; or (ii) an investment fund that is at least ready to be offered (e.g., template investment terms that still contain gaps, or other aspects that need to be negotiated are not generally considered to be “marketing”). Also, according to BaFin’s guidance, as a general rule, where an investment fund operates under a specific name, this indicates that the fund is already set up or is ready to be offered (although this presumption can be rebutted). Further, where institutional investors are actively involved in the structuring of the fund in certain situations, marketing does not take place.
As a consequence, some flexibility was provided, since any activities that did not fall under the definition "marketing" by missing the qualification aspects to be deemed "marketing" according to BaFin's guidance, were not subject to a notification or registration requirement with the BaFin.
The Fund Domicile Act implements a new regime by adopting the EU definition and rules of pre-marketing into 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);
· To potential professional or semi-professional investors domiciled or with their registered office in Germany, or professional investors domiciled or with their registered office in an EU/EEA member state;
· With the intention to determine their interest in an AIF or a compartment thereof that is not yet established, or established but not registered for marketing purposes;
· Without, in each case, constituting an offer or placement of the units or shares of the AIF or compartment.
The introduction of the new pre-marketing rules adds a layer of regulation to the German regime. While any pre-marketing under the pre-existing regime was “unregulated”, if conducted following the BaFin guidance the new regime will require the observation of defined rules.
The New Pre-marketing and Marketing Distinction
The new pre-marketing provisions differentiate between pre-marketing and marketing activities using the following three criteria. Activities are deemed to be pre-marketing (rather than marketing) if the information provided to prospective professional and semi-professional investors:
· Is not sufficient to enable investors to commit to subscribe units or shares of a particular AIF;
· Does not include subscription forms or comparable documents, whether they are in draft or in final form; or
· Does not include constitutional documents, prospectuses or offering documents of an AIF not yet authorized in final form.
Also, to be considered pre-marketing, in cases where the AIFM provides any draft prospectuses or offering documents, these documents must not contain information that can be deemed sufficient for investors to make an investment decision and must clearly state that:
· It does not constitute an offer or an invitation to subscribe for units or shares of an AIF; and
· The information presented therein should not be relied upon as it is incomplete and subject to change.
If these requirements cannot be met, the activities are deemed marketing and the AIF must be registered for marketing in Germany.
The new rules do not provide any further guidance as to what “sufficient for investors to make an investment decision” actually means, and how this requirement applies to such things as term sheets, slide decks, etc.
Obligations for EU AIFMs Under the Pre-marketing Regime
Any EU AIFM must ensure that the pre-marketing of AIFs in Germany is appropriately documented, and within two weeks after the commencement of the pre-marketing activities, EU AIFMs must notify BaFin through the AIFM’s home state regulator. The same applies to German AIFMs, who must notify BaFin of any pre-marketing activities of AIFs and request that the notification be forwarded to the regulators of the EU countries in which the German AIFM performs pre-marketing activities.
Pre-marketing activities can only be rendered by the AIFM and certain third parties on behalf of the AIFM such as other AIFMs, UCITS ManCos, MiFID firms, banks as well as tied agents.
Is Pre-marketing Registration Also Possible for Non-EU AIFMs?
Non-EU AIFMs can perform their pre-marketing activities in Germany, but beginning 2 August 2021, must also register them with BaFin. The German legislator has implemented a mandatory notification procedure for non-EU AIFMs with respect to pre-marketing. There is no clear legal basis in the Directive (EU) 2019/1160 other than in recital 12, which states that “National laws, regulations and administrative provisions necessary to comply with Directive 2011/61/EU and, in particular, with harmonised rules on pre-marketing, should not in any way disadvantage EU AIFMs vis-à-vis non-EU AIFMs.” The requirement for non-EU AIFMs to register for pre-marketing in Germany could be seen as a form of “gold-plating” – on the other hand, it makes it possible for non-EU AIFMs to render any pre-marketing activities in Germany at all. Otherwise they would be limited to mandatorily register their AIFs for marketing before rendering any activities or would need to strictly rely on reverse solicitation.
As a consequence, non-EU AIFMs must also notify the BaFin of the commencement of pre-marketing of AIFs in Germany within two weeks and provide the following information:
· The periods during which the pre-marketing is taking or has taken place;
· A brief description of the pre-marketing, including information on the investment strategies presented; and
· Where relevant, a list of the AIFs and compartments of AIFs that are or were the subject of pre-marketing.
Effects on Reverse Solicitation
The explanatory memorandum of the Fund Domicile Act explicitly states that the concept of reverse solicitation remains available and is not replaced or removed by the pre-marketing rules in general. Therefore, where an investment in an AIF is solely based on the investor’s initiative, neither the marketing nor pre-marketing rules apply. Further, where an AIFM meets with potential investors and merely promotes its general expertise and capabilities as an AIFM, this does not preclude any reverse solicitation being available regarding a specific fund.
However, any investment made in an AIF within 18 months after the commencement of its pre-marketing is deemed to be the result of a marketing activity, which means that the AIF must be registered for marketing with the BaFin before accepting any investors. The wording in the Fund Domicile Act is not completely clear on this point, however, and creates some uncertainties. It states that:
· The AIFM management company must 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, must acquire units or shares of this AIF exclusively within the scope of marketing permitted under the German Capital Investment Code. This means after the AIF has been registered for marketing with BaFin.
· An investment by professional or semi-professional investors in the first 18 months after the AIFM has commenced pre-marketing of units or shares of an AIF mentioned in the information provided in the pre-marketing, or of an AIF registered for the purposes of pre-marketing, shall be deemed to be the result of a marketing activity, and the AIF must be registered for marketing with BaFin before accepting the investor.
· The AIFM must appropriately document any pre-marketing.
In this context, the question arises whether the 18-month restriction is limited to the group of investors that the AIFM or its agent has contacted during the pre-marketing activities, or to all future investors, including those that made the investment on their own initiative.
As discussed above, the explanatory memorandum of the Fund Domicile Act clearly states that the concept of reverse solicitation remains available and is not replaced or removed by the pre-marketing rules. In any event, it seems advisable to carefully and adequately document any pre-marketing activity.
The updated pre-marketing rules for EU-AIFMs provide a harmonised approach throughout Europe instead of the diverging treatment of pre-marketing in different national legal systems. Germany, however, already had a well-functioning method of distinguishing marketing from pre-marketing – or better, from non-marketing. Both EU and non-EU fund managers will therefore need to adapt to the new rules. It remains to be seen how the new regime will work in practice, and whether the BaFin will provide more guidance.
This update was authored by Angelo Lercara and Matthias Meinert.