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Germany’s BaFin clarifies rules for fund distribution and pre-marketing

Out-Law News | 02 Aug 2022 | 4:06 pm | 2 min. read

The German Federal Financial Supervisory Authority (BaFin) has updated its FAQ on the Distribution and Acquisition of Investment Assets under the German Capital Investment Code (KAGB).

The new version of the FAQ (link in German) was published on 5 July 2022. An update had become necessary due to the regulatory changes made by the Fund Jurisdiction Act (FoStoG) as of 3 June 2021, which are now reflected in the updated FAQ.

The new rules for pre-marketing have been in force since 2 August 2021 and apply to fully licensed capital management companies (Kapitalverwaltungsgesellschaften) as well as managers of European Venture Capital Funds and European Social Entrepreneurship Funds. In Germany, this means that almost every exchange between the fund manager and a potential professional or semi-professional investor about a yet-to-be-set-up investment fund now falls under the term ‘pre-marketing’ and thus under the newly created regulations.

Consultation on the FAQ was initiated by BaFin in August 2021 with the publication of a first draft of the new version (link in German). The version now published deviates from this first initial draft in several places. For example, BaFin now clarifies that, in addition to capital management companies, pre-marketing notifications may now be submitted to BaFin by third parties. However, the third party submitting the notification must be able to present a written power of attorney issued by the capital management company. In addition, it has now been clarified that a fund distribution notice cannot replace the pre-marketing notification but can be submitted simultaneously.

BaFin has also clarified that it is neither fund distribution nor pre-marketing if the initiative for both the acquisition of units or shares in a fund or the set-up of a new fund originates from the potential investor. Rather, both cases shall qualify as so-called ‘reverse solicitation’. Once pre-marketing has commenced, reverse solicitation is not permitted for a period of 18 months.

Contrary to the consultation draft, chapter 3.2 of the FAQ has now been significantly shortened. This chapter regulates which information must be provided to the potential investor in a non-advised services transaction. In this regard, the FAQ states: "The KAGB does not differentiate whether it is a non-advised services transaction or not. The key investor information or any mandatory sales documents must be provided to the customer before he places his purchase order." Although the customer may place an order before they have received the required information, according to BaFin, this information must be made available to the customer in any case.

Initially, the first draft provided for the option to refrain from providing sales documents under section 297 paragraphs 1 to 3, 5 and 5 KAGB, provided that this was "not reproachable". This exception no longer exists. Instead, chapter 3.2 of the FAQ now provides for a reference to section 63 paragraph 7 sentence 12 Securities Trading Act (WpHG), according to which in certain cases the subsequent provision only of information on costs and fees is permissible.

Investment funds expert Ruth Rawas of Pinsent Masons said that, like the Fund Jurisdiction Act, BaFin’s FAQ on fund distribution falls short of expectations and provides necessary clarifications on important demarcation issues only to a small extent.

"While the clarifications on fund distribution and pre-marketing as well as, in particular, the extension of the scope of reverse solicitation to the setting-up of an investment fund on the initiative of the potential investor are to be welcomed, the particular interplay between reverse solicitation and the 'lock-up period' of 18 months is still not entirely clear", she says.

“Although good arguments can be brought forward to the assumption that pre-marketing and thus the lock-up period only apply with respect to investors, who were actually approached during the pre-marketing, some residual uncertainty nevertheless remains.”