Although the Alternative Investment Fund Managers Directive (AIFMD) offered an EU-wide passport to authorised firms operating within the bloc, operation of that passport to market funds seamlessly has proved to be more troublesome than it should have. One of the main issues, frequently raised with European regulators, has been the different interpretations of the term “marketing” in different Member States. That is important because it circumscribes what level of market-testing and investor discussion – so-called “pre-marketing” – can take place before an application for the marketing passport is made. In some countries, near-final draft documents can be sent to prospective investors without engaging the definition of marketing; in others, even general discussions about a proposed fund cannot be undertaken without first having acquired the passport. That is obviously problematic for an EU manager planning their marketing strategy – but may also have wider consequences for non-EU managers seeking to approach the European market.

After years of deliberation, the European legislators are now very close to publishing agreed rules that would harmonise the meaning of marketing throughout the EU (actually, the EEA: the EU plus Norway, Iceland, and Liechtenstein). The proposals, first published by the European Commission in March 2018, have now been agreed at a political level and could take effect in 2021. On the face of it, the revised text (repeated in a Regulation that will apply to venture funds within the EuVECA regime) looks helpful and – thanks to the unstinting efforts of our industry associations – represents a significant improvement on the original Commission proposal.

For the first time, “pre-marketing” is defined in the Directive, and any such pre-marketing activity is specifically excluded from the scope of “marketing”. Pre-marketing can therefore be undertaken before a passport filing has been made. The definition itself seems sensible: pre-marketing by an authorised EU fund manager is the provision of information on investment strategies or investment ideas to potential EU investors in order to test their interest in an EU investment fund. Draft documents can be provided – as long as no subscription forms are included, and investors cannot immediately invest.

But, unfortunately, there remain some uncertainties and potential problems with the proposed rules. First, documents sent as part of a pre-marketing campaign cannot include “sufficient information to allow investors to take an investment decision”. It is not clear what that phrase means, and it will no doubt have to be interpreted by regulators once the rules are operational. It may be reasonable to assume that documents which are still draft, and subject to change during the negotiation process, do not include “sufficient” information to allow a final decision to be taken. It remains to be seen whether regulators will agree. If they do, this would be a clear improvement on the current position.

Secondly, there will be a new requirement for a manager to notify its home regulator that pre-marketing is taking place. This does not need to be done in advance (as the European Parliament had wanted) but must be within two weeks of the start of any pre-marketing. The home regulator then notifies the relevant local regulators. This new procedure will enable regulators to ensure that, if a fund does ultimately admit EU investors as a consequence of such pre-marketing activities, it does not do so unless the relevant filings have been made. It will not be possible to claim reverse solicitation (that is, that the investment was made at the investor’s initiative) as regards investors who have been the subject of pre-marketing. That, in itself, seems reasonable, but there is a residual concern that it may be harder to support an assertion that any investor located in a country where there was pre-marketing activity was admitted to the fund as a result of reverse solicitation, even if that particular investor was not approached as part of the pre-marketing campaign.

Thirdly, the rules also include an explicit requirement that any firm that undertakes “pre-marketing” activity must be authorised under the relevant European rules. That will make it very hard for an unauthorised third-party placement agent or other intermediary (including a firm in the same group as the manager) to undertake pre-marketing activity – even if very preliminary, and not therefore of a type that would ordinarily require regulation. After Brexit, that could pose particular problems for UK-regulated firms who do not have an EU-passport.

Finally, there are new restrictions on “de-notification”, a procedure which allows a firm to withdraw its passport notification in countries where it has found no investor interest. The new provisions would mean that de-notification would trigger a 36-month blackout period, during which the manager would not be able to engage in pre-marketing of any funds referred to in the notification, or those with similar investment strategies or “investment ideas”. For EU-based managers this is not a major concern, because there is no great benefit to de-notification for a firm that has the passport, although in some countries there is a small saving on annual registration fees.

Many of these potential issues will not really trouble EU-based firms, and – if interpreted reasonably – the new rules will, in fact, be very helpful. EU managers are subject to the AIFMD anyway, and the revised definitions will often mean they will be able to file for the passport later in the process. Among other benefits, that could help to avoid “material change filings”, required if significant changes are made to draft documents before closing – and which can delay and disrupt the closing process. But more significant problems will arise for non-EU based fund managers (including UK firms after Brexit) if these rules are also transposed into national private placement rules. Any requirement to notify pre-marketing to EU regulators and for any intermediaries to have European regulatory cover, any limits on legitimate reverse solicitation, and restrictions on de-notification (which could mean ongoing reporting and compliance in jurisdictions in which the fund has no investors or investment activity), could make it even harder for international funds to reach European investors.

To be clear: at the moment, these proposed rules would not apply to such third-country managers, but if national regulators choose to apply them – and they are being urged to make sure that there is a level playing field for EU and non-EU managers, so they might – that could be a further significant barrier to accessing the European market.