On December 19, 2012 the European Securities and Market Authority ("ESMA") published two consultation papers on the Directive on Alternative Investment Fund Managers ("AIFMD"). These consultations are of particular importance as they should lead, inter alia, to clarification about certain key concepts of the AIFMD which are of very substantial importance as regards the applicability of the AIFM regime to certain structures.
The consultation papers are based on the Discussion Paper on key concepts of the AIFMD and types of AIFM (ESMA/2012/117) dated February 23, 2012 (please see our Client Memorandum dated February 24, 2012). In the consultation paper on key concepts ESMA sets out guidelines ensuring uniform and consistent application of the definition of the term "AIF" in the meaning of the AIFMD.
Hereinafter, you find a short summary of the most significant aspects of both Consultation Papers.
I. Guidelines on key concepts
According to Art. 4(1)(a) AIFMD "AIFs means collective investment undertakings, including investment compartments thereof, which: (i) raise capital from a number of investors (ii) with a view to investing it in accordance with a defined investment policy for the benefit of those investors; and (iii) do not require authorisation pursuant to Article 5 of Directive 2009/65/EC".
The definition leaves room for interpretation and hence, in practice the question increasingly arises which vehicles qualify as AIF and which do not. In the guidelines EMSA makes efforts to clarify each criterion of the definition and makes clear that in general all of the following criterion must be met in order that an AIF can be assumed. The mere fact that one of the criteria is met does not automatically mean that the vehicle qualifies as AIF.
1. Collective investment undertaking
ESMA proposes that an entity qualifies as a "collective investment undertaking" if all of the following characteristics are met cumulatively:
- It is not an ordinary company with general commercial purpose. This is a welcome clarification with regard to real estate and acquisition companies.
- It pools together capital raised from its investors for the purpose of investment with a view to generating a pooled return for those investors from the investment (whether or not different investors receive returns on a different basis). "Pooled return" means the return generated by the pooled risk arising from acquiring, holding or selling investment assets. This criterion shall not be met if e.g. an entity acting for its own account and whose purpose is to manage the underlying assets as part of a commercial or entrepreneurial activity.
- Its unitholders/shareholders have no daily discretion or control over the management of the undertakings' assets. According to ESMA, the management should be in the hands of the investors in order to avoid a qualification as AIF. It is not sufficient that certain decisions depend on the approval by investors; but rather a control of the day-to-day business OR a control of the underlying assets by the investors shall be required to imply that the relevant entity is not an AIF. This is very satisfactory for 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.
2. Raising capital
ESMA suggests that an activity with the following characteristics shall lead to "raising capital" in the meaning of Art. 4(1)(a)(i) AIFMD:
- taking direct or indirect steps to procure the transfer or commitment of capital by one or more investors to an undertaking for the purpose of investment with a view to generating a pooled return for the investors; and/or
- commercial communication between the undertaking seeking capital or a person or entity acting on its behalf (typically, the AIFM), and the prospective investors, which aims at procuring the transfer of investors' capital.
With a view to internal co-investments by the management, carried interest vehicles and family offices ESMA proposes that when capital is invested in an undertaking only by natural or legal persons or body of persons who are one of the following, this is not likely to be within the scope of "raising capital": (i) a member of the governing body of that (collective) undertaking or the legal person managing that (collective) undertaking, (ii) an employee of the governing body of that undertaking or the legal person managing that undertaking, whose professional activities have a material impact on the risk profile of the undertaking or (iii) a member 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 familial relationship that pre-dates the establishment of the collective investment undertaking. This will facilitate the activities of some smaller family offices; however, larger family offices which manage the assets of a extended circle consisting of close but also distant family members and close friends will not be covered from the exemption.
It is unclear whether EMSA assumes an AIF if also the AIFM or an affiliated company of the AIFM invests in the relevant co-investment vehicle of the managers. ESMA seems to suggest this in its explanations, however, this cannot be found explicitly in the draft guidelines.
3. From a number of investors
ESMA clarifies that raising capital from a number of investors according to Art. 4(1)(a)(i) AIFMD also should be the case if the undertaking in fact has only one investor, unless there exists as legally binding prohibition to accept more than one investor. Contrary, an AIF shall not be assumed if it is agreed in a legally binding form that the vehicle must have only one investor. With regard to feeder and trust structures ESMA suggest to look through and assumes a number of investors also for the master fund if the trustor or feeder represents a number of investors.
4. Defined investment policy
In order to give more guidance on the term "defined investment policy" ESMA provides a list which shall tend to indicate the existence of such a policy. The factors are the following ones:
- 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 including the following:
- to invest in certain categories of assets, or confirm to restrictions on asset allocation;
- to pursue certain strategies;
- to invest in particular geographical regions;
- to confirm to restrictions on leverage;
- to confirm to minimum holding periods; or
- to confirm to other restrictions designed to provide risk diversification.
II. Distinguishing between closed-ended / open-ended funds
The AIFMD distinguishes the legal consequences between open-ended and closed-ended AIFs in different sections without defining these terms. In a separate consultation paper ESMA gives its view on this with proposals for distinguishing. ESMA sets out a proposal of draft regulatory technical standards according to which an AIFM shall be considered to be the Manager of an open-ended AIF, if its unitholders/shareholders have the right to redeem their units or shares out of the assets of the AIF where all the following conditions are met:
- the right may be exercised at least once a year;
- the transaction is carried out at a price that does not vary significantly from the net asset value per unit/share of the AIF available at the time of the transaction;
- no restriction or power provided for in the rules or instrument of incorporation of the AIF or any prospectus to apply special arrangements, such as suspensions, lock-up periods or other similar arrangements arising from the illiquid nature of the AIF's assets, is to be taken into account for this purpose.
The lock-up period referred to above shall be considered to cover any minimum holding period during which unitholders/shareholders shall not have the right to exercise their redemption right. 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 unitholder/shareholder level, with reference to his or her date of subscription, shall be of no significance.
ESMA further proposes that where a change in the redemption policy of the AIF has the effect of changing the type of AIF an AIFM manages, that AIFM shall follow the rules appropriate to the new type of AIF.
The consultations are of significant importance for the practice. They deal with key terms of the AIFM legislation. While it is pleasing to see that ESMA has provided information in parts, in detail much remains unclear. ESMA invites comments and will consider all responses received by February 1, 2013. We will also gladly accept your comments. Patricia Volhard will forward them in her capacity as co-chair of EVCA Tax & Legal Committee and as a member of the legal advisory board of BVK.
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.