Build It - But, Will They Come?

Marketing of a product is key in any business to ensure it succeeds – the ‘build it and they will come’ adage in the internet age especially is never going to work, and it is no different for alternative investment managers.

What is different for our industry is what actually constitutes marketing when it comes to promoting products across borders within the EU. The AIFMD was designed to smooth out this process, to create a harmonised set of rules and a level playing field no matter whether your fund is based in the UK, Ireland or Germany. While this directive has largely achieved many of its aims, some – thanks primarily to the different ways in which local regulators in each country have applied them – are less clearly defined, which means difficulties for both fund managers and investors to know when they are officially being ‘marketed’ to.

It is not helped by three definitions of engagement when it comes to alternative investment funds across the EU: marketing, pre-marketing and reverse solicitation. You would have thought these were easy to define, but the definitions and how they are applied across the different countries within the EU still leave something to be desired.

For example, marketing under the current AIFMD legislation 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 with investors domiciled or with a registered office in the Union.”

Simple enough. But what constitutes that offering or placement is interpreted differently across the various EU member states’ regulatory bodies. In the UK, this would be when all defined contractual terms are offered to an investor. Elsewhere, it could be long before that point with much more basic documentation inviting investment, which is where the ‘marketing’ confusion comes in.

The issue here is the point at which alternative investment fund managers need to notify the relevant member state about marketing activity. If it is hard to define the point at which it is ‘marketing’ in specific places despite the overarching legislation, it is all too easy to fall foul of the rules.

To clarify this, a new cross-border distribution of funds directive – the CBDF Directive – has been implemented that makes amendments to the AIFMD in relation to pre-marketing in a bid to create less confusion and more harmony around this area. Now pre-marketing will be seen as any documents that do not enable someone to physically action the buying of shares in a fund. So, no offer documents or forms, even in draft format, that enable the buying of shares, or offer documents for example for funds that are yet to be established. Nevertheless, there is still the requirement to notify the relevant EU authority within two weeks of starting pre-marketing in a relevant country.

When it comes to reverse solicitation and the investor seeking out your fund and where pre-marketing has been done in that jurisdiction there are other reporting requirements. If any professional investor signs up to a fund within 18 months of that pre-marketing process starting, whether they were pre-marketed to directly or not, there would need to be notification to the relevant regulator under Article 31 or 32 as appropriate so the fund would comply with marketing regulations for that investor to be able to invest. This in effect covers any investor in a relevant fund across the EU.

Under the passporting rules, a regulated third-party pre-marketing on behalf of other funds whether they are in the same jurisdiction or not, will need to be an EU financial services institution – these include MiFID investment firms, and other EU AIFMs. So, a UK or Irish-regulated firm for example can provide these services to a non-EEA firm because of the authorisation that provides. The delegation rules are unlikely to change, so the marketing – in all senses – of funds across the EU by such a firm is no problem.

Please get in touch with Blackheath Capital on +44 (0) 20 3880 6640 or by email on info@blackheathcapital.com should you have any queries on any of our own funds or regulatory services.

Blackheath Capital is also raising funds for its own Dublin-based Global Income Fund, and anyone who is interested in finding out more about the fund or providing seed capital at this time can get in touch with us on the details above.