Investment funds: new rules for distribution and pre-marketing in Germany

The basic rules on marketing apply to fully licensed capital management companies as well as managers of European Venture Capital Funds and European Social Entrepreneurship Funds. They were introduced for the first time in Germany through the implementation of the AIFM Directive in the German Capital Investment Code (Kapitalanlagegesetzbuch) and substantiated by a directly applicable EU regulation and by the EU Directive amending the UCITS Directive. The latter has now been transposed into German law by the Fund Jurisdiction Act.

New rules on pre-marketing

Until now, pre-marketing in Germany was largely unregulated. However, the EU has now uniformly defined the term pre-marketing: Whenever professional investors based in the EU receive information about investment strategies or investment concepts in order to test their interest in a fund that has not yet been launched or for which a marketing notification has not yet been made in the respective EU member state, this is pre-marketing. Germany has extended the concept to semi-professional investors.

Thus, under the new rules, almost any exchange about proposed funds that takes place between the fund manager and a potential professional or semi-professional investor falls under the concept of pre-marketing and thus under the new rules created for this purpose.

At least two weeks before the start of the pre-marketing, the fund manager must inform the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) thereof informally in writing or electronically. The notification must specify the member states and the period in which the pre-marketing will take place. In addition, the pre-marketing must be briefly described, including information on the investment strategy and a list of the alternative investment funds (AIFs) for which the pre-marketing is to take place. If the pre-marketing takes place not only in Germany but also in other member states, BaFin will inform the authorities of the member states thereof.

In addition, all pre-marketing activities should be documented. How this has to be done is not clearly regulated by law. However, it is advisable to note the date of the pre-marketing as well as the name and address of the potential investor and a summary of the content of the pre-marketing activities. It should also be noted whether the pre-marketing was carried out directly by the capital management companies or indirectly through a third party appointed by them.

If a capital management company or a fund manager fails to comply with these obligations, this constitutes an administrative offence which can be punished with a fine of up to €200, 000.

In addition, no documents or information may be provided in the course of pre-marketing that enable investors to commit to the purchase of units or shares in a particular fund. Nor may the information include subscription forms or comparable documents, even in draft form. Incorporation documents, prospectuses or offering documents of an AIF not yet registered may be included to that extent, but not in final form.

If these rules are not observed, it is no longer simply pre-marketing, but a sales activity for which a marketing notification procedure is required.

As a general rule, information provided should not be so extensive as to be sufficient for investors to make an investment decision. Therefore, the documents should be accompanied by a disclaimer stating that they are neither an offer nor an invitation to subscribe for units or shares and that the information set out therein is not to be understood as reliable and binding.

If the AIFM uses third parties for pre-marketing, they must be regulated entities or "tied agents" as defined in section 2 paragraph 10 of the German Banking Act (Kreditwesengesetz).

'Reverse solicitation' no longer possible

From the start of the pre-marketing, so-called 'reverse solicitation' – in which an investor purchases units or shares in a fund on their own initiative – is not permitted for a period of 18 months.

By including a definition of "pre-marketing" in the German Banking Act, it is now no longer possible to rely on the reverse solicitation mechanism and simply claim that the investor has initiated a new investment solely on its own initiative because, under the new rules, the fund manager has officially started the pre-marketing.

New specifications for marketing material

New requirements have also applied to the marketing material of UCITS funds since 2 August: marketing notifications must be recognisable as such and also shed equal light on the opportunities and risks of an investment. In general, they must be fair and unambiguous and must not be misleading.

In this context, almost all forms of advertising communication are classified as marketing notification, regardless of whether they are in paper form or online. However, pre-marketing material is not included. The guidelines (PDF/430 KB) of the European supervisory authority ESMA specify the new requirements.