On 19 December of last year the European Securities and Market Authority (ESMA) issued two consultation papers - "Guidelines on key concepts of the AIFMD" and "Draft regulatory technical standards on types of AIFMs" - with a view to clarify certain criteria and key terms of the upcoming regulatory regime for AIFM and to give guidance as to the scope and applicability of the AIFMD.

Both consultation papers are based on a prior discussion paper, published by ESMA back in February 2012, together with the comments and input from interested parties, and will eventually result in valuable and much-expected guidance for the alternative investment fund industry and other market players concerned by the new regulatory regime.

In the following we will highlight the most significant aspects of both consultation papers. 


According to the definition of the AIFMD the term "alternative investment funds" (in the following referred to as "AIF" or "AIFs") means "collective investment undertakings, including investment compartments thereof, which raise capital from a number of investors with a view to investing it in accordance with a defined investment policy for the benefit of those investors; and do not require authorisation pursuant to Article 5 of Directive 2009/65/EC".

Unfortunately the definition does not give concluding guidance, so that in many cases it is not clear whether a specific investment structure qualifies as an AIF or is to be considered out-of-scope of the AIFMD. Against this backdrop EMSA tries to clarify each of the criteria of the definition, stating that all of these must be met by an investment structure in order to qualify as an AIF under the AIFMD. 

1.1 Proposed clarification of term / criterion "Collective Investment Undertaking"

ESMA proposes that an investment structure or entity will qualify as a "collective investment undertaking" if all of the following characteristics are met (i.e. in a cumulative manner):

  • The entity is not an ordinary company with general commercial purpose.
  • The entity pools capital which is raised from its investors for the purpose of investment in order to generate a "pooled return" for those investors resulting from this investment. In this regard "pooled return" means the return generated by the pooled risks arising from acquiring, holding or selling investment assets. This is not the case when the entity in question is acting for its own account and its purpose is to manage the underlying assets as part of a commercial or entrepreneurial activity.
  • The entity's investors do not have daily discretion or control over the management of the underlying assets, meaning that the investors do not control the day-to-day business of the entity nor control its underlying assets; mere approval requirements for certain decisions will not result in a control in the above meaning. Joint venture structures where joint venture partners typically have the authority to decide on business decisions, in particular with regard to the assets of the company, should be hence out of scope.

1.2 Proposed clarification of term / criterion of "Raising Capital"

ESMA further proposes that an activity with the following characteristics is tantamount to "raising capital" in accordance with the AIFMD:

  • The undertaking of direct or indirect steps with a view to procure the transfer or commitment of capital by one or more investors to an undertaking for the purpose of investment in order to generate a pooled return for the investors; and/or
  • Any kind of commercial communication between the undertaking seeking capital or a person or entity acting on its behalf (i.e. typically the AIFM), and the prospective investors, which aims at pro-curing the transfer of investors' capital.

With regard to internal co-investments by the management, carried interest vehicles and family offices ESMA suggests that whenever capital is invested in an undertaking solely by (natural or legal) persons (including bodies of persons) as named below, this capital is not "raised" in the sense of the AIFMD:

  • Members of the governing body of the undertaking or its legal person managing the undertaking, 
  • Employees of the governing body of the undertaking or the legal person managing that undertaking, provided the professional activities of these employees have a material impact on the risk profile of the undertaking, or
  • Members of a pre-existing group, for the investment of whose private wealth the undertaking has been exclusively established. 

ESMA defines "pre-existing group" investing in a collective investment undertaking as a group of persons connected by a "close family relationship" that exists prior to the establishment of the collective investment undertaking, as it is the case of (smaller) single Family Offices. Larger Family Offices managing the assets of a more extensive circle of persons consisting of close as wells as distant family members and family-related friends may therefore not be covered from this exemption.

1.3  Proposed clarification of term / criterion "From a number of investors"

ESMA states that raising capital "from a number of investors" according to the definition of AIF does not generally and in all circumstances exclude undertakings with only one investor. Only undertakings subject to a legally binding prohibition to accept more than one investor (as set out by the management rules, articles or prospectus or imposed by law) are out of scope in this respect. With regard to feeder and trust structures ESMA proposes a look-through approach so that in particular master funds with a single feeder representing several underlying investors are in scope of the AIFMD. 

1.4 Proposed clarification of term / criterion "Defined Investment Policy"

ESMA provides a list of several criteria which are supposed to indicate the existence of a "defined investment policy", namely the following factors are considered by ESMA as being a clear indication for an established investment policy:

  • The investment policy is determined and fixed, at least by the time that investors' commitments to the undertaking become binding on them;
  • The investment policy is set out in a document which becomes part of or is referenced in the rules or instruments of incorporation of the undertaking;
  • The undertaking or the entity managing it has an obligation (however arising) to investors, which is legally enforceable by them, to follow the investment policy, including all changes to it;
  • The investment policy specifies investment guidelines, with reference to criteria such as specific categories of assets, certain strategies, particular geographical regions, restrictions on leverage, minimum holding periods or any other restrictions designed to provide risk diversification. 


The AIFMD distinguishes between open-ended and closed-ended AIFs in various parts, without however providing a clear definition hereto.

In its second consultation paper – aiming at a clarification in this regard by setting technical standards on types of AIFM - ESMA singles out a series of specific criteria which have to be fulfilled by an AIF to be considered as open-ended for the purposes to the upcoming AIFMD-regime. According to the ESMA approach "open-ended" means that investors are granted the right to redeem their units or shares in the AIF out of the assets of the AIF and that this right may be exercised at least once a year at a price that does not vary significantly from the net asset value per unit/share of the AIF available at the time of redemption. Any temporary restrictions stated in the AIFs management rules, its articles of incorporation (if in corporate form) or in its prospectus, such as suspensions, lock-up periods or other similar arrangements arising from the illiquid nature of the AIF's assets, are not to be taken into account for this purpose. For the sake of clarity ESMA states that any lock-up periods are to be disregarded, regardless of whether the period is set at the AIF level, with reference to the date of creation of that AIF or the date of commencement of activities or at each individual investor level in relation to the subscription date.

The closing date for responses to both ESMA consultations is 1 February 2013. The guidelines and technical standards, which will help the alternative investment industry to gauge the applicability and scope of the new rules for managing AIFs, will probably be finalized and published before June 2013.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.