Pre-marketing is a technique introduced to remove barriers to the cross-border distribution of funds. The aim in harmonising this practice is to increase its transparency and legal certainty.
What is pre-marketing?
Pre-marketing is a concept recently harmonised by Directive EU 2019/1160 and Regulation EU 2019/1156. It is defined in Articles 15 and 16 of Regulation EU 2019/1156 and Article 2 of Directive 2019/1160. It is stated that it is the activity consisting in the communication of information to potential investments by a manager. No matter if this communication is direct or indirect. It is made to check their interest in an investment fund before registering it or marketing it. Also, this information must be addressed to residents of the European Union. In addition, premarketing must not consist of the offer of the product or its placement.
In Directive 2011/61/EU on alternative investment funds (AIF) it was defined a concept of pre-marketing. However, with Regulation 2019/1156 it was introduced for European venture capital funds (EVCF) and European social enterprise funds (ESEF). Both were regulated by Regulations EU 345/2013 and 346/2013 respectively. These have been amended by Regulation 2019/1156.
Directive 1160/2019 harmonises the concept of pre-marketing for AIFs with these previous vehicles. This Directive amends Directive 2011/61/EU.
Both the 2019 Directive and Regulation are made to solve an earlier problem on pre-marketing.
Problem: disparity of regulations in Member States
The problem arises because pre-marketing was a technique allowed only in some European Union countries. Thus, the conditions of pre-marketing depended on individual state regulations. Even this concept did not exist in other regulations, which limited its international practice. Therefore, with the new regulations, the concept and its regulation for AIFs, EVCFs and ESEFs are unified.
So, this disparity is shown in the Consultations on CIS, EVCs and other collective investment schemes of the CNMV. The CNMV is the Spanish regulator on this matter, is the national securities market commission. In this document dated 13 October 2016 the CNMV resolved a consultation on pre-marketing. Specifically it was about venture capital companies and closed-ended collective investment schemes. The question asked whether management companies can carry out pre-marketing before registering the vehicle in the CNMV. The CNMV replied that there were no regulations governing this concept in Spain. In Spain only marketing is regulated, which is the advertising activity to attract customers once the vehicle is registered. Therefore, as it only contemplates marketing, European passports are required for the marketing of foreign vehicles.
Pre-marketing information requirements
Premarketing consists of a communication of information to a potential investor. However, the information provided must meet a number of requirements in order to be considered premarketing.
- It shall not be sufficient for the investor to commit to acquire units
- It may not consist of subscription forms even if they are drafts
- It shall not be a prospectus or a definitive document of incorporation or offer of a fund not yet established.
- It must clearly indicate that it is not an offer for the subscription of units
- It should indicate that the information is incomplete and therefore unreliable as it may change.
- It may not be information on a fund that has already been established. With the exception of a fund which has been established but its marketing has not been commenced and notified.
- It must indicate a particular investment idea or strategy.
The advantages of pre-marketing:
- Communication by the manager of this activity does not have to be before it takes place. In other words, it is not a request for authorisation. The competent authority can be informed later of the content of the information and the subjects to which it is addressed.
- Pre-marketing avoids incurring the costs of registering and marketing funds in third countries. When even the manager of such funds does not know if their marketing will be successful. So, it will incur such costs when the manager estimates that it will have subscriptions.
- For the same reason as above of avoiding its prior registration, it saves the manager time. He will save time by not having to complete the registration requirements.
The manager must ensure that no investor will obtain units through pre-marketing. The subject contacted during this pre-marketing task may only acquire units in the normal marketing process.
It must be addressed to professional investors. If such investor decides to buy within 18 months after the start of pre-marketing it will be considered as marketing. It will not be considered as a reverse solicitation. That is, not a purchase of units of a fund by an investor on his own initiative.
The manager must notify this activity within two weeks of the start of pre-marketing. The communication shall be by physical or digital means to the competent authority of its home Member State. In that communication it shall state in which Member States the investors, who are or have been addressed, are located. This communication shall therefore be about the pre-marketing activity being carried out or which has been completed. It shall describe what information has been communicated and on which investment vehicle. With this information the home State should inform the host Member State of this activity. Besides, the manager shall ensure that the pre-marketing is sufficiently documented.
A final consideration is that the work of the pre-marketing manager can be carried out by a third party. This third party, however, can only be a certain type of entity. An investment firm (IF), a credit institution, an MCCIS or an AIFM. The latter are understood to be a management company for collective investment schemes and an alternative investment fund manager. It is also permitted for third parties to act as a tied agent. For this purpose, a tied agent is defined in Directive 2014/65/EU. This is a natural or legal person who under the full responsibility of an IF promotes an investment to clients.
Limits to AIF pre-marketing
There is a limitation in the case of AIF, when marketing arrangements with intermediaries in any State are ceased. In this case the manager will not be able to carry out pre-marketing activities for the next 36 months.
Entry into force
According to Article 19 of the Regulation, these provisions on pre-marketing shall apply from August 2nd 2021. And according to Article 3 of the Directive, the same date is set. The Member States will have until then to transpose the directive.
Interestingly, the same directive provides for amendments to both the regulation of AIFs and UCITS. UCITS are harmonised collective investment undertakings. They are considered as such those domiciled in a Member State and subject to Directive 2009/65/EU. However, the concept of pre-marketing is not introduced for UCITS.
Article 5 of the Directive itself responds to this. It states that the European Commission will propose to harmonise this concept for UCITS by August 2nd 2023 at the latest. So, it will wait two years at most to see the result of pre-marketing´s harmonization in AIF, ESEF and EVCF. After that time it will propose to amend the UCITS Directive.
Pre-marketing is a very useful activity to expand the marketing of investment funds at European level. Since this activity makes it possible to test whether a certain product will indeed be bought by investors. Thus, managers know whether they will have investors and make an informed decision about registering a fund in another State. This allows the fund management company to save time and money. It will not have to meet the requirements or incur the costs of registration.
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