In March this year, we reported on a proposal issued by the European Commission to harmonise the definition of “marketing” for the purposes of the Alternative Investment Fund Managers Directive (AIFMD) and EuVECA (the venture capital rulebook). In common with many others in the private funds industry, we argued that, if adopted, the Commission’s proposal would make it much harder to market private funds in Europe. Fortunately, the European Union’s tri-party legislative process gives plenty of opportunity for proposals to be modified, and revisions to the proposal suggested by the Council of the European Union could rescue it.
For the uninitiated, which is probably most people, the Council of the EU (not the same as the European Council, and very different to the Council of Europe) is one of the three pillars of the legislative procedure in the European Union. The European Commission proposes laws, and then the European Parliament and the Council of the EU (often referred to as “the Council”) have to jointly agree them. The Council is made up of representatives of the EU’s 28 Member States and, somewhat confusingly, has a rotating presidency: the EU’s Member States take it in turns for six months each. At the moment, it is Bulgaria’s turn, although Austria takes over on Sunday (1 July).
Like us, a number of Member States were not very impressed with the text of the Commission’s initial proposal, and the Bulgarian presidency suggested an alternative. That “compromise proposal” was then discussed and adapted, and text has now been approved by the Council of the EU that will form the basis of discussions with the Commission and the Parliament.
The Council’s agreed text is a huge improvement on the March proposal. As the Commission originally envisaged the new rules, virtually no “pre-marketing” activity could be conducted by a manager authorised under the AIFMD before registering the fund with the manager’s local regulator (and providing it with “final form” documents). “Pre-marketing” would only be possible if the fund vehicle had not been established and, even then, would not allow distribution of Private Placement Memoranda or Limited Partnership Agreements, even if in draft form. That proposal – which we would expect to be applied to non-EU funds as well – misunderstands the way that private funds are negotiated with investors, and would impose unnecessary and potentially unworkable constraints on the industry.
The Council’s text rejects that approach and suggests one that is more in line with the practice that is already established in many Member States. Whether or not the fund vehicle is already established, firms would be allowed to send draft documents to potential investors before registering the fund with their regulator – provided they were marked as “draft” and made it clear that they were subject to change. It would also have to be clear that the firm was not making an offer to subscribe at that point, and the documents could not include “all relevant information allowing investors to take an investment decision”. There is still a lack of clarity in that latter requirement, but the proposal represents a significant improvement and a victory for industry lobbyists.
However, there is still a long way to go, and some uncertainty remains. It is not yet known how the Commission will respond, and the Parliament, whose views will also be crucial, has yet to weigh in.
It remains unclear why policymakers are concerned about an expansive definition of “pre-marketing” and what mischief they are seeking to prevent. Harmonisation is a laudable goal, but making it harder for sophisticated investors to shape the investment products in which they invest seems like an odd policy objective for an administration that is trying to promote investment.