Since 2015, the European Commission has been working hard on a proposal to integrate Europe’s capital markets. This is a laudable objective and much of the output so far has been positive: reforms to the European venture capital regime (known as EuVECA) to make it easier for venture managers to raise funds across borders; the launch of a venture capital fund of funds will provide a welcome boost to the sector; simplifications to the rules for smaller companies launching an Initial Public Offering (IPO) on Europe’s stock markets will ease exits. The European venture capital industry has welcomed these and several other changes – indeed, in many cases the changes were initially suggested by industry associations.
But this week’s announcements by the Commission on fund marketing are decidedly unhelpful and undermine the stated aims of the Capital Markets Union (CMU) project.
On Monday, the Commission launched a proposal for a new pan-EU Directive that would harmonise the definition of “marketing” for the purposes of the Alternative Investment Fund Managers Directive (AIFMD). In itself, that is not necessarily a bad idea: fund marketing rules are undoubtedly fragmented – even for EU managers who are using the passport, which was supposed to facilitate cross-border distribution for fully regulated firms. The main problem for those firms has been that the definition of “pre-marketing” – the activities that are permitted before a marketing notification must be made to the regulator – varies considerably between countries. For example, in the UK and France no notification is required until quite late in the process of discussing a potential fund with investors. In many other countries – including, for example, Italy, Spain and Ireland – the notification is required at the very outset. Some countries fall somewhere in between, leading to confusion and costs for private fund managers.
The problem is not, therefore, that the Commission proposes to harmonise the definition of “marketing” (and then, for fully authorised EU managers, to prohibit anything that falls within it until a notification is made). That would be helpful. The issue is that the proposed definition of “marketing” is very expansive, restricting the scope for pre-marketing activities considerably. Any communication mentioning a specific fund, or (for example) a draft term sheet or slide deck with specific information about proposed fund terms, would be within the new definition. That is particularly unhelpful for private funds, because the terms – and, indeed, often the structure – are negotiated, and significant market testing and pre-launch discussions with prospective investors should be in the interests of both investors and fund managers. Restricting the opportunity for sophisticated parties to have those discussions serves no clear purpose, while potentially making it harder to raise capital in Europe. That is a perverse outcome for an initiative deliberately aiming to do the opposite, and the Commission’s proposal was quickly criticised by industry insiders, including the European industry association Invest Europe.
There are other proposed changes in this week’s announcement – you can read our fuller summary here – and they could also have been more helpful. For example, the proposal to establish principles for the fees that can be charged by regulators in a country in which a fund is marketing would be an improvement on the national autonomy that exists at the moment. But, better still, the Commission could have prohibited additional fees altogether. That would have boosted cross-border marketing.
Meanwhile, national rules will continue to regulate EU marketing activity by smaller (sub-threshold) European buyout firms, which still face very considerable barriers to raising funds on a cross-border basis. If the Commission wants to promote an integrated capital market, those fragmented rules would be a good place to look.