When AIFMD was firstly introduced, there have been extensive talks around the possibility of invoking reverse solicitation rule under AIFMD to justify inflow of capital from European domiciled professional investors to managers, European or not, that did not comply with AIFMD. Few years down the path of AIFMD implementation, these talks on reverse solicitation rule under AIFMD are still somehow ongoing.
Especially in light of the proposal of the European Commission in March 2018 for an Omnibus Directive, with the introduction of a new concept of premarketing under AIFMD, and the recent amendments made thereto by the ECON Committee of the European Parliament, it is interesting to explore the relation between reverse solicitation rule under AIFMD and premarketing, with a view to define a clear road map for all US fund managers interested in raising capital from EU institutional investors.
Reverse solicitation under AIFMD and premarketing
AIFMD Recital 70 states that the provisions of AIFMD should not affect the current situation, whereby a professional investor domiciled in the European Union may invest in AIFs at its own initiative and irrespective of where the AIFM and/or the AIFs are domiciled. In other words, acceptance in principle of the existence of reverse solicitation rule under AIFMD was codified, without attempting to further define it, at least in the first version of the directive.
Conversely, one of the gaps in the European regulation on financial services was to be found around the concept of marketing of investment products. Until AIFMD was enacted, there has not been real endeavour to regulate this topic at European level. AIFMD introduces a definition of marketing and also for the first time with European relevance. Article 4 states in fact that marketing is the direct or indirect offering or placement at the initiative, or on behalf, of an AIFM of units or shares of an AIF it manages to or with investors domiciled or with a registered office in the European Union.
It is legitimate to assume that, given that AIFMD stipulated for the first time that a marketing authorisation was required in cases of offers that did not require any authorisation until then, the intent to introduce such definition was to ensure clarity around activities that would trigger a marketing authorisation, vis-a-vis other activities that would have not necessarily amounted to marketing as such. Of course, given that AIFMD is a directive and member states still have room for discretion in implementing its provisions in internal rules, the concept of marketing so introduced has been morphed on local practices and customs existing in the various European domiciles. So marketing and reverse solicitation rule under AIFMD share the same destiny of being interpreted differently – in a more extensive or restrictive fashion – depending on the European domicile at issue.
This is where the introduction of a definition of premarketing steps in, first with the proposal for an Omnibus Directive and then with the amended draft to the same proposed by the ECON committee by the end of 2018. The premise behind premarketing lies in a very common practice in the alternative investment funds world, whereby fund managers would typically test with perspective investors the interest and appetite for certain strategies before proceeding with the establishment of an alternative investment fund. Of course, when a first definition of premarketing was proposed to be introduced, the concerns of the industry voiced were mainly directed to the fact that it was too restrictive and would have impacted negatively the ability of managers to test the waters for their strategies with investors. The approach adopted with the amended definition of premarketing ensures that, on the one hand, premarketing remains a possibility whilst, on the other, it is prevented that any such premarketing strategies are used to ultimately invoke reverse solicitation and de facto circumvent compliance with AIFMD. To this specific end, in light of avoidance of claims of reverse solicitation rule under AIFMD based on premarketing activities, the latest draft proposal contains a rule whereby interests in AIFs purchased by investors within an 18 months period from the premarketing activities carried out, will have to be made on the basis of a marketing authorisation obtained for those specific AIFs.
Of course, the concept of reverse solicitation rule under AIFMD is not a legal concept per se, rather an exception to the concept of marketing as defined there-under. It seems that the route adopted by the European parliament to address the issue of reverse solicitation rule under AIFMD and circumvention of AIFMD application is the one of creating more structure around premarketing activities, starting with a definition premarketing. This approach makes more sense than trying to define reverse solicitation rule under AIFMD even further, just because the AIFMD introduced a concept and a definition of marketing. We will see if this latest draft will survive in the European parliament as it is and whether we will be able to conclude that reverse solicitation rule under AIFMD is excluded for 18 months further any premarketing activity carried out.