Private Placement of Alternative Investment Funds in the European Union (EU): Changing Regulatory Landscape

I. Overview

The European Commission’s Alternative Investment Fund Managers Directive (“AIFMD”) was designed to establish a unified framework throughout the EU for regulating previously unregulated Alternative Investment Funds (“AIF”).

The AIFMD is effective as per July 22, 2013. The AIFMD, as any other EU directive, however needs to be transposed into European Union members’ national laws before it will actually have effect. Moreover, the AIFMD leaves the member states with the flexibility to make their own choices on certain aspects. This concerns also the private placement of units in AIF´s.

In preparation for its enforcement by the individual EU member states, this memorandum will discuss the AIFMD’s effect on non-EU managers of AIFs (“AIFM”) marketing non-EU AIFs within the EU.  The memorandum will first give a broad overview of some of the AIFMD’s measures significant for non-EU AIFMs, followed by a table summarizing how the private placement of AIF´s in the major capital markets of the EU is affected the AIFMD.

It should be noted that prior to July 22, 2013, the marketing of AIF´s in EU member states already required an individual analysis for each member state. For the time being not much has changed in this respect but marketing unregulated funds to selected non retail investors has certainly become more complex due to the AIFMD. Also these distributions may no longer be expected to remain of relatively little interest to securities regulators and fund managers may therefore be required to strengthen their compliance efforts in this area.

II. Regulatory Target – AIF Managers

The AIFMD seeks to regulate a set of previously unregulated AIFs, namely, “all collective investment undertakings that are not regulated under the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive.”  These include hedge funds, private equity funds, commodity funds, and real estate funds, among others.

Rather than regulating AIFs directly, however, the AIFMD regulates AIFMs—that is, entities providing either risk or portfolio management to an AIF.  According to the AIFMD, each AIF may only have a single entity as its manager.

The AIFMD applies to AIFMs that are: (1) themselves established in the EU (“EU AIFM”); (2) AIFMs that are not established in an EU country (“non-EU AIFM”), but that manage and market AIFs established in the EU (“EU AIF”); or (3) non-EU AIFMs that market AIFs that are not established in a EU country (“non-EU AIF”) within an EU jurisdiction.

This memo principally deals with the third category, non-EU AIFMs that market non-EU AIFs in the EU.

III. Exemption – Small AIFs

Pursuant to the AIFMD, AIFMs that manage small funds are exempt from the full rigor of the AIFMD regulatory regime.  A lighter regulatory regime is applicable to these AIFMs.

The AIFMD defines AIFMs that manage small funds as either: (1) an AIFM with aggregate assets under management not exceeding € 500 million, where the AIFs are not leveraged, and the investors do not have redemption rights for the first five years after their investment; or (2) an AIFM with aggregate assets under management not exceeding € 100 million.

AIFMs of smaller funds are largely exempted from the AIFMD, and will only be subject to registration, and limited reporting requirements.

IV. Marketing – Definition

As previously discussed, the AIFMD applies to non-EU AIFMs marketing non-EU AIFs in one or more EU jurisdictions.

The AIFMD defines marketing 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.”  This marketing definition does not include reverse solicitation, where the investor initiates the investment, and the investment is not at the AIFM’s direct or indirect initiative.

Thus, for example, if an EU investor initiated an investment in a U.S. AIF, managed by a U.S. AIFM, the U.S. AIFM and AIF would be unaffected by the AIFMD.  The AIFMD would only apply to U.S. AIFMs managing U.S. AIFs, if the U.S. AIFM solicited investment in the EU.

V. Regulating Non-EU AIFMs – National Private Placement Regimes

The AIFMD is designed to phase out national private placement regimes, creating a unified regulatory regime throughout the EU.  However, the AIFMD is scheduled to come into force in stages.

Between July 22, 2013, and 2018 (at the earliest), non-EU AIFMs will be able to market their non-EU AIFs in an EU jurisdiction (“EU Target Jurisdiction”) subject to the national private placement regimes applicable in that EU jurisdiction.

Thus for example, a U.S. AIFM marketing a U.S. AIF in the UK will be able to do so subject to the UK’s private placement regime.

VI. Regulating Non-EU AIFMs – Additional AIFMD Requirements

As explained, through 2018, the AIFMD will largely permit non-EU AIFMs to market non-EU AIFs subject to the private placement regime in the EU Target Jurisdiction.

However, the AIFMD does include three additional requirements for the non-EU AIFMD to be able to take advantage of the EU Target Jurisdiction’s private placement regime.  These include, specific disclosure and reporting requirements, cooperation agreements, and exclusion of AIFs and AIFMs established in certain countries.  Each of these will be discussed in turn.

a. Applicable AIFMD Reporting Requirements

By its terms, the AIFMD will require even non-EU AIFMs marketing non-EU AIFs pursuant to national private placement regimes to comply with certain AIFMD provisions concerning annual reports, disclosures to investors, periodic reporting to regulators, and acquisition of control over EU companies.

A non-EU AIFM will thus be required to make available: (1) an annual report for each non-EU AIF that it markets in the EU; (2) information relevant to potential investors, as well as changes in material information previously disclosed; (3) regular reports to the national regulator in the EU Target Jurisdiction; and (4) disclosure information to a listed or unlisted EU company over which the non-EU AIFM acquires control.

b. Cooperation Agreements

For non-EU AIFMs to be able to market their non-EU AIFs in an EU jurisdiction, the AIFMD requires that there be cooperation agreements in place between the regulator in the non-AIFM’s home jurisdiction, and the EU Target Jurisdiction.

ESMA has negotiated memoranda of understanding (“MOU”) with 34 regulators in a variety of jurisdictions.  These include regulators in Albania, Australia, Bermuda, Brazil, the British Virgin Islands, Canada (the provincial regulators of Alberta, Quebec and Ontario as well as the Superintendent of Financial Institutions), the Cayman Islands, Dubai, Guernsey, Hong Kong (Hong Kong Monetary Authority and Securities and Futures Commission), India, the Isle of Man, Israel, Jersey, Kenya, Malaysia’s Labuan Financial Services Authority, Mauritius, Montenegro, Morocco, Pakistan, Serbia, Singapore, Switzerland, Tanzania, Thailand, the United Arab Emirates and the United States (Federal Reserve Board, Office of the Comptroller of the Currency and Securities and Exchange Commission).

These MOUs, however, are insufficient to permit non-EU AIFMs to market their non-EU AIFs in any EU jurisdiction.  Rather, the EU Target Country must have a separate cooperation agreement with the regulator in the non-EU AIFM’s home jurisdiction (presumably these separate cooperation agreements will be based on the MOUs negotiated by ESMA).

Thus, for example, for a U.S. AIFM to be able to market its U.S. AIF in the UK, the UK’s Financial Conduct Authority must have a cooperation agreement with the United States’ Securities and Exchange Commission.

c. Exclusion of Non-Cooperative Country or Territory

Finally, pursuant to the AIFMD, to be able to market based on the EU Target Country’s private placement regime, neither the non-EU AIFM nor the non-EU AIF may be considered a country considered a “Non-Cooperative Country or Territory,” by the Financial Action Task Force on anti-money laundering, and terrorist financing.

In sum, through 2018, non-EU AIFMs may market their non-EU AIFs in EU jurisdictions according to the relevant EU Target Jurisdiction’s private placement regime, subject to a few additional AIFMD requirements.

VII. The AIFMD in Each EU Jurisdiction

The above discussion outlines the AIFMD’s general requirements pertaining to non-EU AIFMs marketing non-EU AIFs.

However, because to take effect the AIFMD must be transposed into the national law of each EU jurisdiction, and because through 2018 the AIFMD largely relies on national private placement rules to regulate non-EU AIFMs, there is bound to be substantial variation in the AIFMD’s application across EU jurisdictions.

The table below details relevant aspects of the AIFMD’s application in each of the EU jurisdictions (plus Norway, and Switzerland).  Supplementing the memorandum, the table serves as a basic guide for the AIFMD’s application to non-EU AIFMs seeking to market their non-EU AIFs in each of the EU jurisdictions.  The chart includes, for each country, whether it has transposed the AIFMD on time (“On time” / “Not on time”), an overview of the private placement regime, relevant reporting requirements, transitional provisions, and a list of the countries with which a cooperation agreement is in place.

Because some of the EU countries have yet to transpose the AIFMD, or have not completed the transposition, and cooperation agreement process we will indicate on the outline where completion of the process is pending.

BELGIUM

• AIFMD Transposition
  • Not on time
• Private Placement Regime
  • At present, AIFMs must be registered locally, and are subject to a minimum investment amount of € 250,000.
• Relevant Reporting Requirements – Pending
• Transitional Provisions – Pending
• Cooperation Agreements with non-EU Countries – Pending

DENMARK

• AIFMD Transposition
  • Not on time.
• Private Placement Regime
  • Denmark permits marketing to a maximum of 8 offerees, and requires that a non-EU AIFM be licensed in its member state of reference.¹
• Relevant Reporting Requirements
  • Non-EU AIFs licensed in another EU jurisdiction pursuant to AIFM regulations must submit additional documentation to the Danish FSA, including operating and managing plans, and contact information.
• Transitional Provisions
  • Transitional provisions will permit non-EU AIFMs to market AIFs under Denmark’s current private placement regime until at least July 22, 2014 (provided that the AIFMs commenced marketing prior to the transposition date of July 22, 2013).
• Cooperation Agreements with non-EU Countries – Pending

FINLAND

• AIFMD Transposition
  • Not on time.
• Private Placement Regime
  • Finland’s private placement regime permits AIFMs to market only to “professional” clients.
• Relevant Reporting Requirements – Pending
• Transitional Provisions
  • The AIFMD is not expected to apply to non-EU AIFMs until 2015.
  • Transitional rules have been proposed (although not yet adopted) permitting AIFMs to market pursuant to existing private placement rules, provided that the AIFMs can show that they have made a good faith effort to comply with AIFMD.
• Cooperation Agreements with non-EU Countries – Pending

FRANCE

• AIFMD Transposition
  • On time.
• Private Placement Regime
  • Under its present private placement regime, France does not permit AIFMs to actively solicit investment.
• Relevant Reporting Requirements – Pending
• Transitional Provisions
  • It appears that a transitional period will apply until 22 July 2014, during which all French AIFMs will be able to continue marketing and / or managing any AIFs in France on the pre-AIFMD basis (for example by using reverse solicitation).
  • Other AIFMs (whether EU but outside France or non-EU) would, therefore, need to be authorized.
• Cooperation Agreements with non-EU Countries – Pending

GERMANY

• AIFMD Transposition
  • On time.
• Private Placement Regime
  • Under the new German private placement regime, non-EU AIFMs may market to professional investors, subject to requirements.
  • To market in Germany, the non-EU AIFM must appoint an independent entity to act as a depositary (as defined in the AIFMD), and notify BaFin, Germany’s markets regulator, of the appointed depository’s identity.
• Relevant Reporting Requirements
  • Notifying BaFin of its intention to market in Germany, and include an application with a comprehensive list of information and documents.  BaFin will have up to two months to review, and decide upon the application.
  • Making certain initial and ongoing investor disclosures.
  • Complying with reporting requirements to BaFin.
• Transitional Provisions
  • Non-EU AIFMs that marketed funds in Germany by prior to the AIFMD’s July 22, 2013 effective date (“previously marketed funds”) will be permitted to continue marketing those previously marketed funds under existing private placement rules until July 21, 2014.
• Cooperation Agreements with non-EU Countries – Pending

IRELAND

• AIFMD Transposition
  • On time.
• Private Placement Regime
  • Under Ireland’s private placement regime, non-EU AIFMs will be able to market in Ireland without restrictions additional to those of the AIFMD, discussed above.
• Relevant Reporting Requirements
  • Ireland will only require that the non-EU AIFMs comply with the AIFMD’s reporting requirements for non-EU AIFMs discussed above.
• Transitional Provisions
  • Non-EU AIFMs managing qualified investor alternative investment funds (“QIAIF”), as defined under the relevant Irish provisions, which were authorized prior to the July 22, 2013 transposition date will not be required to be AIFMD compliant until July 22, 2015.
  • Non-EU AIFMs managing QIAIFs authorized after July 22, 2013 will have two years from the QIAIF’s launch date to become AIFMD compliant.
• Cooperation Agreements with non-EU Countries – Pending

ITALY

• AIFMD Transposition
  • Not on time.
• Private Placement Regime
  • Under Italy’s current private placement regime, which it seems will be available to non-EU AIFMs through 2015, AIFMs may market only to “expert” investors.
• Relevant Reporting Requirements
  • Currently, AIFMs must disclose their balance sheets, certain administrative documents, and financial reports regarding their managers’ activities.
• Transitional Provisions – Pending
• Cooperation Agreements with non-EU Countries – Pending

LUXEMBOURG

• AIFMD Transposition
  • On time.
• Private Placement Regime
  • Through 2018, Luxembourg will permit small and non-EU AIFMs to market pursuant to its private placement regime.
• Relevant Reporting Requirements
  • Luxembourg imposes certain transparency requirements on AIFMs, including disclosure of an AIFM’s net asset value, and disclosures upon gaining control of an EU company.
• Transitional Provisions
  • Beginning on July 22, 2014, in addition to complying with Luxembourg’s private placement regime, non-EU AIFMs will be required to comply with the third country provisions of the AIFMD.
• Cooperation Agreements with non-EU Countries
  • Luxembourg signed cooperation agreements with all 34 of the regulators that entered into MOUs with ESMA.

THE NETHERLANDS

• AIFMD Transposition
  • On time.
• Private Placement Regime
  • Netherlands will permit certain AIFMs to market pursuant to its private placement regime provided offerings are: (1) to less than 150 persons; (2) units have an individual nominal value of at least EUR 100,000 or consist of a package of units with at value of at least EUR 100,000; or (3) offered to professional investors only.
  • Non-EU AIFMs are exempted for offerings to qualified investors only if the AIFM is not domiciled in a non cooperative country under FATF rules and the Dutch regulator and the foreign regulator entered into a MOU.
  • AIFMs licensed by the relevant securities regulators in the USA, Jersey and Guernsey may offer to any investor under a license recognition regime.
• Relevant Reporting Requirements
  • Notification to Netherlands Financial Markets Authority and reporting of investments, risk positions and investment strategy of AIF to Dutch Central Bank.
• Transitional Provisions
  • Several grandfathering provisions for non-EU AIF’s that stopped marketing prior to 22 July 2013.
• Cooperation Agreements with non-EU Countries – Pending

POLAND

• AIFMD Transposition
  • Not on time.
• Private Placement Regime
  • So far, the Polish regulator has not published an AIFMD transposition regulation.
  • However, under the existing private placement regime, non-EU AIFs that wish to market its units in Poland may do so if:
    • The units are qualified as equity or debt securities under their respective governing law; and
    • The units are offered under the “private placement” regime, meaning a nonpublic offer to sell securities to no more than 149 identified investors
• Relevant Reporting Requirements – Pending
• Transitional Provisions
  • As mentioned above, the Polish regulator has not made an official announcement concerning AIFMS transposition.
• However, a representative of the Polish regulator recently indicated in an interview that:
  • AIFMs currently marketing AIFs in Poland will have two years to determine whether they fall within the regulations of the AIFD; and
  • If so, the AIFMs will be required to become AIFMD compliant within the two-year period.
• Cooperation Agreements with non-EU Countries – Pending

SPAIN

• AIFMD Transposition
  • Not on time.
• Private Placement Regime
  • Currently, no private placement regime is available, and it in not anticipated that a private placement regime will be made available in the implementation of the AIFMD.
  • Under proposed rules, registration with, and authorization from the Spanish regulator is required for non-EU AIFMs to market non-EU AIFs to professional investors only in Spain.
  • Authorization to market may be denied if:
    • The non-EU AIF’s home state applies discriminatory marketing rules against Spanish AIFs;
    • The non-EU AIF provides insufficient assurance of compliance with Spanish law, or insufficient protection of Spanish investors; or
    • The non-EU AIFs will disrupt competition in the Spanish AIF market.
• Relevant Reporting Requirements – Pending
• Transitional Provisions – Pending
• Cooperation Agreements with non-EU Countries – Pending

SWEDEN

• AIFMD Transposition
  • Not on time.
• Private Placement Regime
  • At present, there is no private placement regime for marketing AIFs in Sweden.
  • Many AIFs, simply fall outside the scope of Sweden’s regulations, and may market freely in Sweden
  • Other AIFs affected by Sweden’s regulation may only be marketed by a Swedish AIFM, or an AIFM regulated in another EU country.
  • It is unclear whether non-EU AIFMs will be able to continue to market freely after the AIFMD comes into force, or whether they will be prevented from marketing in Sweden altogether
• Relevant Reporting Requirements – Pending
• Transitional Provisions – Pending
• Cooperation Agreements with non-EU Countries – Pending

UNITED KINGDOM

• AIFMD Transposition
  • On time.
• Private Placement Regime
  • Provided that an AIF has been marketed by the non-EU AIFM prior to July 22, 2013 in an EEA jurisdiction, the non-EU AIFM will be able to continue to market the funds under the UK’s private placement regime until July 21, 2014 without complying with the requirements of the AIFMD.
  • For new funds marketed from July 22, 2013, the non-EU AIFM will need to comply with the reporting requirements of the AIFMD set out below.
• Relevant Reporting Requirements
  • Prior to marketing in the UK, an AIFM must give the FCA written notification of its intention to do so.
  • In the notification, the AIFM must affirm that it is responsible for complying with the relevant AIFMD requirements, and that these relevant requirements have been satisfied.
  • Once it has submitted the notification to the FCA, the AIFM may begin marketing—it need not wait for the FCA’s approval.
  • Additionally, the AIFM is subject to disclosure requirements, including:
    • Ensuring that investor disclosure in fund marketing materials meets the disclosure and transparency requirements set out in the directive;
    • Reporting either annually or semi-annually to the FCA proscribed information; and
    • Submitting and publishing an annual report for each AIF that the AIFM manages or markets.
• Transitional Provisions
  • The non-EU AIFMs that marketed any AIF in the EU prior to the AIFMD’s July 22, 2013 effective date will be permitted to market AIFs in the UK under the pre-AIFMD rules until July 21, 2014.
  • Non-EU AIFMs taking advantage of the transitional provision may do so irrespective of whether or not the FSA has cooperation agreements in place
• Cooperation Agreements with non-EU Countries
  • The UK signed cooperation agreements with all 34 of the regulators that entered into MOUs with ESMA.

NORWAY²

• Private Placement Regime
  • At present, Norway does not permit soliciting investment in AIFs.
• Relevant Reporting Requirements – Pending
• Transitional Provisions – Pending
• Cooperation Agreements with EU Countries – Pending

SWITZERLAND

• Private Placement Regime
  • Non-EU AIFMs may market through the Swiss private placement regime without any additional regulation, approval, or license requirement or the investor is:
    • A License financial institution;
    • A regulated insurance institution; or
    • An investor that has concluded a written discretionary asset management agreement with a licensed financial institution, or a financial intermediary, provided that information is provided to the investor through the financial institution, or intermediary, and that the financial intermediary is:
      • Regulated by anti-money laundering regulation;
      • Governed by the code of conduct employed by a specific self-regulatory body recognized by the Swiss regulator; and
      • Compliant with the recognized standards of the self-regulatory body.
• Relevant Reporting Requirements – Pending
• Transitional Provisions
  • Non-Swiss AIFMs have until March 1, 2015 to:
    • Appoint a Swizz representative, and a Swiss paying agent; and
    • Comply with all relevant regulations.
  • Non-Swiss AIFMs that have yet to be subject to Swiss regulation must:
    • Contact, and register with the Swiss regulator by September 1, 2013; and
    • If not sufficiently licensed in their home country, apply for a license by March 1, 2015.
  • Cooperation Agreements with EU Countries – Pending

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_{¹ An AIFM’s member state of reference (“MSR”) is the member state where the marketing of most of the AIF takes place.  So, for example if a U.S. AIFM markets in Denmark, and Denmark is the Member State of Reference, then the Danish FSA must issue the U.S. AIFM a license prior to commencement of the U.S. AIFM’s marketing activities in Denmark.}

_{² Norway, and Switzerland are non-EU countries of interest.  Because they are not part of the EU, they are not required to transpose the AIFMD.}