Conference Season: What constitutes pre-marketing?

So what’s new? Pre-marketing a fund in the EU (since 2nd August 2021) now requires a filing notification. Fund sponsors attending conferences in the EU should seek legal advice initially to scope out whether their proposed activities during and after conference attendance constitute pre-marketing. There is also increased scrutiny from EU regulators, not least because of Brexit (which officially took effect on 31st January 2020) to ensure that the rules and regulations for access to the EU market are being adhered to.

Am I pre-marketing by attending a conference in the EU?

Attendance per se, does not necessarily mean you are undertaking pre-marketing activities in the EU. However, what you do during the conference and/or post conference may bring such activities under the definition of “pre-marketing”.

Under the new Cross Border Distribution Directive (‘CBDD’), pre-marketing is defined as:

1. the provision of information or communication, direct or indirect, on investment strategies or investment ideas;
2. by an EU AIFM or on its behalf (e.g. by a placement agent);
3. to potential professional investors domiciled or with a registered office in the EU;
   in order to test their interest in an alternative investment fund (an ‘AIF’), which is not yet established or established but not yet notified for marketing under Directive 2011/61/EU (the ‘AIFMD’); and
4. which does not amount to an offer to invest in the relevant AIF.

The legislation is relatively new, therefore there may be situations where it is arguable whether or not you are pre-marketing. However, if you (or your placement agent) are sharing materials with fund specific details (in draft) at the conference where you are looking for potential interest to invest, this will likely fall within the definition of pre-marketing. In our experience, the materials/information shared during pre-marketing can range from a couple of pages of draft heads of terms, to draft LPA/PPMs in a data room with due diligence materials on the fund sponsor. There is no prescriptive list of what must be shared in pre-marketing and legal advice should be sought that what is shared is allowed under CBDD. What definitively is not allowed under the CBDD is any final documents relating to the fund or a subscription document/application form for interest (in draft or in final form).

The conference itself is only part of the potential scope of activities that may fall under the CBDD, as any subsequent communication thereafter arising from conference follow-ups may also constitute pre-marketing depending on whether it falls within the above definition.

Is it reverse solicitation if a contact from a conference requests information about the fund?

If at the conference, one only talks about generic fund sponsor corporate identity, history, team, fund strategies, performance to date etc, then can subsequent contact from a potential investor, with whom the initial contact was made at a conference, constitute reverse solicitation?

If a pre-marketing notification filing has been filed in respect of the proposed fund (see below discussions), the answer to this question bears little practical difference because in filing for pre-marketing, you are effectively barred from admitting investors by reverse solicitation for a period of 18 months from the date you start pre-marketing as stated in the notification filing.  Although it is not clear in the legislation how the prohibition will be applied, it would appear the industry is taking the view that this applies on a country-by-country basis, dependent on whether a pre-marketing notification has been filed in that country.

If a pre-marketing filing has not been undertaken, it may be arguable whether this is genuine reverse solicitation, and legal advice should be sought to confirm this. In ESMA’s statement of 13 January 2021, a year after Brexit, ESMA specifically raised the issue of questionable practices relying on reverse solicitation and noted that: “As for the means of such solicitations, ESMA reminds firms that every communication means used, such as press releases, advertising on internet, brochures, phone calls or face-to-face meetings should be considered to determine if the client or potential client has been subject to any solicitation, promotion or advertising in the Union on the firm’s investment services or activities or on financial instruments.”

Broadly speaking there is now an acceptance that reverse solicitation is not a marketing strategy.  For fund sponsors engaging an EU regulated placement agent, those distributors would also be keen to ensure that the fund is approved for pre-marketing or formal marketing before discussions or distributions of any materials with fund specific information begin. This has been brought in to focus recently, when in April 2022 a French distributor was fined and banned from marketing for 5 years by the Autorité des Marchés Financiers for actively marketing funds which were not actually approved for marketing in France.

So I am pre-marketing, what regulatory cover do I need?

This varies depending on the current level of regulatory permissions, and the location of the fund sponsor.

EU regulated AIFM – For sponsors with an EU regulated AIFM, the regulatory risk is easy to manage by filing a notification filing with the home regulator specifying amongst other things, the countries in which they wish to pre-market the fund. The home regulator will then notify the relevant regulators in those countries included in the notification. This aspect deals with the fund itself being approved for pre-marketing. If no placement agent is engaged, an EU AIFM is permitted to undertake the activities of pre-marketing themselves. The notification filing can be undertaken within 2 weeks of having started pre-marketing so can be done after attendance at the conference.

Non-EU fund sponsors – By appointing Langham Hall as the EU regulated host AIFM, the non-EU fund sponsor can benefit from pre-marketing passport in the EU. In this solution, Langham Hall will file the pre-marketing notification and oversee the sponsor/distributor during the pre-marketing period. This solution can be in place within a couple of weeks (although should really be discussed before the commencement of pre-marketing, i.e., prior to your attendance at the EU conference).

The alternative to using a host AIFM is to navigate the pre-marketing rules on a country-by-country basis.  Because the CBDD states the national rules “should not in any way disadvantage EU AIFMs vis-à-vis non-EU AIFMs”, this does not mean a reversion back to pre-CBDD days and relying on a pre-marketing matrix formulated at the outset. At the very least it is expected there will be a notification requirement. However, this is far from clear for many countries and in some countries pre-marketing by a non-EU fund sponsor may be prohibited altogether. It is also unclear if non-EU fund sponsors may undertake the activity of distribution without an EU regulated entity’s involvement.

It should be noted that filing a pre-marketing notification does not oblige the fund sponsor to go down any set route with respect to formal marketing. Depending on the appetite and requirements of investors as may be gauged during the pre-marketing period, the fund sponsor can choose to admit investors by way of formal permissions under NPPR, set up a fund in the EU that benefits from the AIFMD passport, or decide it is not cost effective to go down either route. In any case, no investors should be admitted by way of reverse solicitation as per discussions above for a period of 18 months after commencing pre-marketing.

Summary

Fund sponsors should carefully consider their intentions and what they will share during and as follow up to attendance at conferences as some activities may fall under pre-marketing.

Pre-marketing regulation has dual aspects: (i) for the (potential) fund itself to be pre-marketed (achieved by notification filing); and (ii) for the party undertaking the distribution to be regulated in the EU (either by engaging an EU regulated placement agent or engaging a third party AIFM, who can also do the filing, and provide distribution cover).

Langham Hall can assist with providing solutions for non-EU fund sponsors undertaking pre-marketing. This solution does not oblige the fund sponsor to undertake any other services with Langham Hall.  In the event the fund sponsor wishes to market under the NPPRs, Langham Hall can assist with providing Depositary Lite services (required for registering in Denmark and Germany) and Annex IV reporting.  If the fund sponsor wishes to benefit from the marketing passport via a Luxembourg fund (usually as a parallel to a non-EU fund), we can assist with the administration, domiciliation, Host AIFM and Depositary services for your fund.

Given Langham Hall’s presence in fund jurisdictions such as Hong Kong, Singapore and New York, fund sponsors in North America and Asia can bring all administration services for both parallel vehicles under one roof if preferred.

Please note the information contained in this article is for general purposes only and does not purport to constitute legal advice from Langham Hall.  Please do not rely on the contents of this article without getting proper legal advice.