Your SlideShare is downloading. ×
ALTERNATIVE INVESTMENT MANAGEMENT ASSOCIATION (AIMA)
ALTERNATIVE INVESTMENT MANAGEMENT ASSOCIATION (AIMA)
ALTERNATIVE INVESTMENT MANAGEMENT ASSOCIATION (AIMA)
ALTERNATIVE INVESTMENT MANAGEMENT ASSOCIATION (AIMA)
ALTERNATIVE INVESTMENT MANAGEMENT ASSOCIATION (AIMA)
ALTERNATIVE INVESTMENT MANAGEMENT ASSOCIATION (AIMA)
ALTERNATIVE INVESTMENT MANAGEMENT ASSOCIATION (AIMA)
ALTERNATIVE INVESTMENT MANAGEMENT ASSOCIATION (AIMA)
ALTERNATIVE INVESTMENT MANAGEMENT ASSOCIATION (AIMA)
ALTERNATIVE INVESTMENT MANAGEMENT ASSOCIATION (AIMA)
ALTERNATIVE INVESTMENT MANAGEMENT ASSOCIATION (AIMA)
ALTERNATIVE INVESTMENT MANAGEMENT ASSOCIATION (AIMA)
ALTERNATIVE INVESTMENT MANAGEMENT ASSOCIATION (AIMA)
ALTERNATIVE INVESTMENT MANAGEMENT ASSOCIATION (AIMA)
ALTERNATIVE INVESTMENT MANAGEMENT ASSOCIATION (AIMA)
ALTERNATIVE INVESTMENT MANAGEMENT ASSOCIATION (AIMA)
ALTERNATIVE INVESTMENT MANAGEMENT ASSOCIATION (AIMA)
ALTERNATIVE INVESTMENT MANAGEMENT ASSOCIATION (AIMA)
ALTERNATIVE INVESTMENT MANAGEMENT ASSOCIATION (AIMA)
ALTERNATIVE INVESTMENT MANAGEMENT ASSOCIATION (AIMA)
ALTERNATIVE INVESTMENT MANAGEMENT ASSOCIATION (AIMA)
ALTERNATIVE INVESTMENT MANAGEMENT ASSOCIATION (AIMA)
ALTERNATIVE INVESTMENT MANAGEMENT ASSOCIATION (AIMA)
ALTERNATIVE INVESTMENT MANAGEMENT ASSOCIATION (AIMA)
ALTERNATIVE INVESTMENT MANAGEMENT ASSOCIATION (AIMA)
ALTERNATIVE INVESTMENT MANAGEMENT ASSOCIATION (AIMA)
ALTERNATIVE INVESTMENT MANAGEMENT ASSOCIATION (AIMA)
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×
Saving this for later? Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime – even offline.
Text the download link to your phone
Standard text messaging rates apply

ALTERNATIVE INVESTMENT MANAGEMENT ASSOCIATION (AIMA)

468

Published on

Published in: Economy & Finance, Business
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
468
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
9
Comments
0
Likes
0
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide

Transcript

  • 1. ALTERNATIVE INVESTMENT MANAGEMENT ASSOCIATION (AIMA) SPECIAL REPORT: Marketing Hedge Funds By Iain Cullen1 st Please note that the information herein is correct as at 1 October 1999 and should not be relied upon to be accurate after this date. This report is not intended to be a definitive or exhaustive analysis of the issues involved nor to render legal advice. It seeks only to give the reader an overall view of the subject matter and it is essential that persons wishing to rely on any matter referred to in this report should first seek specific advice. INTRODUCTION This Special Report examines the laws and regulations governing the marketing of offshore hedge funds in France, Germany, Switzerland and the United Kingdom other than by way of a public offer. Given the lack of harmonisation of such laws and regulations, the author posed a series of questions to his collaborators to order to compare, at least to a certain extent, the position in the different jurisdictions. Unless stated to the contrary, the answers apply both to open-ended and to closed-ended funds, whether in the form of an investment company or a limited partnership. Issued by Alternative Investment Management Association (AIMA) Lower Ground Floor, 10 Stanhope Gate, Mayfair, London W1K 1AL Tel +44 (0)207 659 9920 Fax +44 (0)207 659 9921 E-mail – info@aima.org Internet – http://www.aima.org 1 Mr Cullen is a partner in the international law firm of Simmons & Simmons and Co-Chairman of the Regulatory Committee of the Alternative Investment Management Association. The author is grateful for the assistance of the following colleagues who were kind enough to review the contents of this report in relation to their respective jurisdictions: Dr. Friedrich Schwank, Law Offices Dr. F. Schwank (Austria); Frank de Paepe, Simmons & Simmons (Belgium); Catherine Kendal, Advokatfirmaet O. Bondo Svane (Denmark); Antti Heikkilä, Roschier-Holmberg & Waselius (Finland); Colin Millar and Abdel-Hamid Mazouz, Simmons & Simmons (France) Michael Leistikow, Boesebeck Droste (Germany); James Levy, J.A. Hassan & Partners (Gibraltar); William Simpson, Ozannes (Guernsey); Mary McKenna, A & L Goodbody (Ireland); Andrew Baker, Cains (Isle of Man); Manfredi Vianini Tolomei, Simmons & Simmons Grippo (Italy); David Moon, Mourant du Feu & Jeune (Jersey); Claude Kremer Arendt & Medernach (Luxembourg); Karin Schouwenberg, Nauta Dutilh (Netherlands); Ole Christian Hoie, Advokatfirmaet Ole Christian Hoie (Norway); Paula Rosado Pereira, Grupo Legal Português (Portugal); Gonzalo F. Atela, Lexfide Estudio Juridico y Fiscal (Spain); Martin Börresen, Lagerlöf & Leman (Sweden); and Jeanne Terracina, Schellenberg & Haissly (Switzerland). AIMA Special Report: Marketing Hedge Funds (France, Germany, Switzerland, UK) © Simmons & Simmons, 1999 1
  • 2. SPECIAL REPORT MARKETING HEDGE FUNDS INDEX France 3 Germany 8 Switzerland 12 United Kingdom 18 Reproduction of part or all of the contents of this publication is strictly prohibited, unless prior permission is given, in writing, by the author and AIMA. Alternative Investment Management Association (AIMA) Lower Ground Floor, 10 Stanhope Gate, Mayfair, London W1K 1AL Tel +44 (0)20 7659 9920 Fax +44 (0)20 7659 9921 E-mail – info@aima.org Internet – http://www.aima.org AIMA Special Report: Marketing Hedge Funds (France, Germany, Switzerland, UK) © Simmons & Simmons, 1999 2
  • 3. FRANCE Are there established rules or guidelines, which distinguish between a public offering and a private placement? Yes. The new article 6 of Ordonnance n° 67-833 of 28 September 1967, (the “Ordonnance”), which was incorporated by article 30 of Law n° 98-546 of 2 July 1998 (the “Law”) has recast the definition of a public offering of securities requiring the preparation of a prospectus to be lodged with, and approved by, the Commission des opérations de bourse (the “COB”, the French equivalent of the SEC) and introduced at the same time as a statutory exemption from this requirement. Public offering: A public offering in France, known as a "public call for investment", is regarded as made where: • a listing of financial instruments is sought on one of the regulated French financial markets, i.e. the stock markets (First Market, Second Market and New Market) and the futures and options markets (MATIF and Monep); or • the offering is advertised in France or French investors are solicited or a bank or investment services provider is appointed to market or place the offering with French investors. The rule applies to both primary offerings of currently unissued financial instruments and secondary offerings by way of offers for sale of existing financial instruments. The new article 6 of the Ordonnance refers to those financial instruments mentioned in Article 1 of Law n° 96-597 of 02 July 1996. These are defined to include not only shares, stocks and bonds in French or foreign issuers but also a wide range of other securities including shares or units in investment funds, exchange-traded and OTC futures and options as well as derivative instruments such as swaps, caps, collars and floors. The definition would cover investment funds, be they open-ended or closed-ended investment companies or in the form of limited partnerships. It was therefore initially thought that the marketing of shares or units in investment funds fell within the public offering legislation and that the private placement exemption established by the Law could be relied upon, if applicable, to place shares in funds without being subject to prospectus requirements. However, COB regulation 98-08 (published on 2 March 1999), which implements the new legislation concerning public offerings, limits the scope of the definition of financial instruments to shares, stocks and bonds issued by French and foreign issuers. The COB has explained this restriction by the fact that other securities (i.e. shares or units in investment funds, exchange- traded and OTC futures and options and derivative instruments) are separately regulated. In view of the above, the COB considers that offerings of shares or units in investment funds do not fall within the scope of the recent public offering legislation. Consequently, an offeror of shares or units in investment funds cannot rely on the private placement exemption established by the Law in order to avoid the application of prospectus requirements. AIMA Special Report: Marketing Hedge Funds (France, Germany, Switzerland, UK) © Simmons & Simmons, 1999 3
  • 4. Which, if any, of the following categories of person in France could be contacted direct by the fund/general partner, the investment manager or by their respective representatives:- (a) individual investors; (b) institutional investors (e.g. large corporates and funds of funds); (c) pension funds; (d) insurance companies? Treasury consent: The prior authorisation of the Ministry of Finance (Treasury Department) is required for the issue, placing or sale in France of shares or units in collective investment schemes constituted outside the European Economic Area (“EEA”): Article 10 of Decree n° 89- 938 of 29 December 1989. In our view, the requirement for Treasury consent will be triggered if an issue, placing or sale results from a contact with the relevant French investor which has been initiated by the non-EEA fund (fund/general partner or the investment manager) or their respective representatives. COB approval: In addition to the requirement for Treasury consent in respect of non-EEA funds, COB Regulation 98-04 provides that the marketing (commercialisation) in France of non-EEA funds or EEA funds which do not comply with the UCITS Directive (it has been assumed throughout that a hedge fund will not comply with the UCITS Directive) requires the prior approval of the COB. The related COB Instruction of 15 December 1998 provides that the application for approval must be made on the same basis as for a French fund, but does not specify what must be done in practice to reflect the fact that the applicant fund is not French. Assuming approval is granted: • the COB may require to be copied with all documents prepared or distributed by the fund and has the right to modify at any time the form and content of such documents; • the person responsible for marketing the fund must enquire as to the aims, investment experience and financial position of the potential investor; • the fund must be adapted to the situation of the potential investor; • pertinent information must be provided to the potential investor in order to enable the investor to make an investment or disinvestment decision in full knowledge of the facts; and • the person who markets the fund must alert the potential investor to the risks involved. Again no guidance is given as to the practical steps to be followed as a consequence of the fund not being French. It follows from the above that none of the categories of person referred to in this question may be contacted without COB approval and, in the case of non-EEA funds, Treasury consent. If approval is sought (and obtained) the categories of person which may be contacted will be agreed with the COB and the Treasury, as the case may be, although the policy of the COB and the Treasury to date has been not to grant approval to offshore hedge funds. AIMA Special Report: Marketing Hedge Funds (France, Germany, Switzerland, UK) © Simmons & Simmons, 1999 4
  • 5. Would the fund/general partner or the investment manager be able to gain access to individual investors by, for example, marketing the shares/limited partnership interests to banks who act on a discretionary basis for their customers? No. As noted above, marketing even to banks is subject to COB and, possibly, Treasury approval. Is there a numerical limit on the number of investors who may be approached or may invest in the shares/limited partnership interests? Does this limit differ according to the person who conducts the marketing? If COB and/or Treasury approval is sought, the number of investors who may be approached or may invest in the fund will be agreed with the COB and/or Treasury (assuming approval is granted). The limit should not differ according to the person who conducts the marketing. Assuming that some form of marketing is permissible, which of the following activities would be permitted:- (a) mailing the prospectus/offering memorandum and other marketing material to investors; (b) the fund/general partner or the investment manager’s representatives meeting with potential investors in France; (c) “road shows” or other group seminars/presentations in France; (d) calling investors by telephone? As noted above, COB approval will be required to “market” the shares/limited partnership interests in France and (for non-EEA funds) Treasury approval will be required to issue, place or sell the shares/limited partnership interests in France. There is no case law on what constitutes marketing for the purposes of COB Regulation 98-04, although in its bulletin of February 1999, the COB published some practical guidelines in respect of the marketing of foreign funds to qualified investors in France. The COB considers that any “active” marketing of a foreign fund in France, regardless of the type of investor targeted, must receive prior authorisation. However, “passive” marketing, which the COB defines as marketing without advertising or solicitation i.e. at the investor’s initiative, is unregulated. Advertising: There is currently no legislation which specifically regulates advertising of funds, although articles in the press or advertising by means of literature made available to the French public in places such as banks or by general mailing to potential investors will be regarded as prohibited advertising. On the other hand, the COB has accepted that general advertisements in international financial publications, which are also published in France, do not constitute prohibited advertising. There would therefore be no restriction on advertising the shares/limited partnership interests in such publications. Solicitation: Solicitation includes the carrying on of the following activities on a regular basis: visiting people at their domicile or at their place of work for the purpose of giving advice on investment in securities, or giving such advice in public places which are not intended for this purpose as well as offering investment services or giving investment advice on a regular basis by sending letters or notes or by telephone. The activities mentioned at (a) to (d) inclusive would AIMA Special Report: Marketing Hedge Funds (France, Germany, Switzerland, UK) © Simmons & Simmons, 1999 5
  • 6. fall under the definition of solicitation, whether carried out by the fund/general partner, the investment manager or by their representatives and whether in France or from abroad. Would the shares/limited partnership interests be able to be issued to an individual who applied on a wholly unsolicited basis? Yes, although for the reasons given above, it would be advisable to retain evidence that the individual had not been solicited. For example, if in writing, the initial contact from the investor should be kept on file. Are there any advantages in having the shares/limited partnership interests listed on a stock exchange (such as the Irish and/or Luxembourg Stock Exchange)? There is no relevant advantage in the shares/limited partnership interests being listed. On the other hand, if the shares/limited partnership interests were listed it would bring them within the scope of Article 18 of the Law of 28 March 1885 which provides that the public may not be solicited, in whatever form and by whatever means, directly or indirectly, with a view to transactions on a foreign exchange in securities, negotiable forward contracts or any financial products unless the exchange has been recognised on terms laid down by decree and subject to reciprocity arrangements. The relevant exchanges, which have been recognised to date, are the major futures and options exchanges. Article 18 was however amended in 1996 to the effect that its provisions, save insofar as they relate to the protection of public saving, do not apply to regulated exchanges whose headquarters are based in a Member State of the European Community. The COB does not appear to have relied upon the “protection of public saving” carve-out in Article 18 in relation to a European Community exchange - the legislation is principally aimed at unregulated exchanges or markets in speculative products - and the risk of it so doing, particularly in the case of a listing of the shares/limited partnership interests on the Luxembourg and, possibly, Irish Stock Exchanges can accordingly be regarded as very remote. Can marketing which is conducted on a private placement basis rely on English language documentation or is there any requirement to make French translations available? As indicated above, the private placement rules do not apply to the offering of shares or units in funds. That said, pursuant to Law n° 94-665 of 4 August 1994 relating to the mandatory use of the French language (the “Toubon Law”), the French language must be used in connection with the “designation, offer, ..., description of the content or of the warranty conditions of a product or a service” in the French territory. In addition, the Toubon Law provides that contracts entered into with public entities or private entities performing a public service mission must, subject to limited exceptions, be drafted in French. A ministerial circular of 19 March 1996, relating to the application of the Toubon Law, provides in particular that all documents used for the purpose of informing consumers or users (in France), including prospectuses, brochures, catalogues or other information, documents, order forms, warranty certificates, standard form agreements (insurance contracts, offers of financial services), must be in the French language. AIMA Special Report: Marketing Hedge Funds (France, Germany, Switzerland, UK) © Simmons & Simmons, 1999 6
  • 7. There does not appear to be any case law relating to the application of the Toubon Law in connection with offers of financial products or instruments. The Toubon Law is drafted in wide terms, which may allow a judge to consider that any document aimed at French consumers - (there is no definition of the term “consumer” and it is therefore not possible to take a view whether it applies only to natural persons or would also cover corporates and institutions) - should be in French, and accordingly impose sanctions (mainly in the form of fines) in the case of breach. Leaving aside the question of public or quasi-public entities, the general view is that the Toubon Law only applies where the document(s) in question are widely spread among the French public or advertised in the French press. Indeed, the COB even accepts English language prospectuses in relation to international offerings listed on the French Stock Exchange and which are technically available for investment by the public. Given that any proposed marketing activities would not involve the distribution of documents to the public at large nor advertising in the French press, it should be possible as a matter of practice to rely upon English documentation. So far as regards public entities (for example, local authorities, the SNCF, EDF, GDF, France Telecom, the Post Office and the French equivalent of the National Savings Bank), and whilst the matter is not free from doubt, it would appear necessary to prepare French versions of the contractual documentation. On the other hand, this would not appear to be necessary for quasi- public entities as investment in the fund would be unrelated to their public service mission. Is a “negative clearance” route available by which the regulatory authorities will confirm that, if conducted in a particular way, the marketing of the shares/limited partnership interests will not infringe local marketing rules and regulations? Prior to the introduction of the Law there existed an informal negative clearance procedure whereby the COB (in liaison with the Treasury, as appropriate) would confirm whether the marketing of transferable securities would constitute a public call for investment requiring the preparation of a prospectus. This procedure has now been superseded by the Law. If the prospectus/offering memorandum were only distributed on a private placement basis, should it contain any specific wording drawing attention to this? Again, the offeror cannot rely on the private placement exemption. In addition, the question is, in principle, academic since marketing is unauthorised without COB and/or Treasury approval. If there is a concern that the offering material might end up in the hands of a French investor, it is recommended that all written material provided to investors should contain a selling restriction (for example, in the form of a sticker) along the following lines: “The shares/limited partnership interests may not lawfully be offered or sold in France. Approval for the marketing [, issue, placing or sale] [include if Treasury consent is required] of the shares/limited partnership interests has not been sought from the Commission des opérations de bourse [or the French Ministry of Finance (Treasury Department)] [include if Treasury consent is required] and neither this document nor any other offering material or information has been submitted to the Commission des opérations de bourse.” AIMA Special Report: Marketing Hedge Funds (France, Germany, Switzerland, UK) © Simmons & Simmons, 1999 7
  • 8. GERMANY Are there established rules or guidelines which distinguish between a public offering and a private placement?. German law does not establish a clear distinction between a public offering and a private placement. The Act Concerning the Distribution of Foreign Investment Shares and the Taxation of Their Proceeds which regulates the distribution of shares in a foreign investment fund to the general public in Germany does not contain definitions of “public offering” and “private placement”. Likewise, the Securities Sales Prospectus Act which generally requires the publication of a “sales prospectus” if an offer is made to the general public in Germany does not contain definitions of these terms. However, the German Federal Supervisory Office for Securities Trading has provided some guidelines as to the meaning of public offering and private placement under German law in its Announcement Concerning the Securities Sales Prospectus Act dated April 15, 1996. In the Announcement, “public offering” is defined as an offering for sale to an undefined number of people, e.g., by advertising in any kind of media, circular letters etc., the recipients of which are not yet known to the offeror. “Private placement” is defined as an offer made to a limited number of sophisticated private and/or institutional investors who do not require protection by a prospectus. Such limited number of addressees only exists, where they are previously and individually known to the offeror and are selectively approached by the offeror on the basis of individual criteria. With respect to the further distribution of shares acquired by way of private placement, it might still be considered a private placement if the recipient, doing business in Germany on a regular basis, offers foreign investment shares to its previously known clients within the scope of regular consulting on investment and other financial matters. However, whether a particular activity qualifies as a public offering or private placement needs to be reviewed on a case-by-case basis. In general, German authorities and courts tend to interpret public offering as broadly as possible, and private placement as narrowly as possible. Which, if any, of the following categories of persons in Germany could be contacted direct by the fund/general partner, the investment manager or by their respective representatives: (a) individual investors (b) institutional clients (e.g. large corporates and funds of funds); (c) pension funds; (d) insurance companies? Provided the marketing of shares/limited partnership interests in the fund qualifies as a private placement, the fund/general partner/investment manager or their respective representatives may directly contact any of the above-mentioned categories of persons in Germany. AIMA Special Report: Marketing Hedge Funds (France, Germany, Switzerland, UK) © Simmons & Simmons, 1999 8
  • 9. Would the fund/general partner or the investment manager be able to gain access to individual investors by, for example, marketing the shares/limited partnership interests to banks who act on a discretionary basis for their customers? Marketing the share/limited partnership interests to a bank is an additional means of gaining access to individual investors, provided that it is done by way of a private placement. Is there a numerical limit on the number of investors who may be approached, or may invest in the shares/limited partnership interests? Does this limit differ according to the person who conducts the marketing? The German Federal Supervisory Office for Securities Trading does not state a specific numerical limit in its Announcement dated April 15, 1996, but requires the offering to be made "to a limited number of sophisticated private and/or institutional investors” in order to qualify as private placement. A placement should be deemed to be a private placement where less than 80 investors are concerned and will usually be treated as public offering where more than 200 potential investors are addressed. Generally, it does not make any difference who conducts the marketing in Germany. Assuming that some form of marketing is permissible, which of the following activities would be permitted: (a) mailing the prospectus/offering memorandum and other marketing material to investors; (b) the fund/general partner or the investment manager's representatives meeting with potential investors in Germany; (c) “road shows” or other group seminars/presentations in Germany; (d) calling investors by telephone? Mailing of the prospectus/offering memorandum and other marketing material to investors: According to section 1 of the Law Against Unfair Competition, a person who acts in commercial transactions for purposes of competition contrary to honest practices is subject to claims to refrain from acting and to damages. In general, it is not prohibited to mail letters, whether uninvited or not, provided that the content of such letters does not infringe any other statutes or principles under German law. Therefore, it should be permitted to mail the Fund’s prospectus/offering memorandum and other marketing material to potential investors in Germany, provided the mailing keeps within the scope of a private placement. Uninvited fax marketing activities are considered to violate section 1 of the Law Against Unfair Competition if the investor has not declared his explicit or implied consent which, for instance, may be assumed in connection with an existing business relationship. Uninvited fax marketing is viewed as illegal cold calling (see below). The fund/general partner or the investment manager’s representatives meeting with potential investors in Germany: Under the Law Against Unfair Competition, uninvited and unannounced sales visits are admissible, except where the marketing agent or employee restricts the investor's free contractual will by taking advantage of the investor's surprise or deception caused by the visit. However, according to section 56 of the Trade Code, the sale of securities (including shares in foreign investment funds) is prohibited if it is part of any form of itinerant trade. An itinerant trade is defined as the commercial offer or purchase of goods or services by an independent or AIMA Special Report: Marketing Hedge Funds (France, Germany, Switzerland, UK) © Simmons & Simmons, 1999 9
  • 10. dependent person without prior invitation outside of his place of business. Whilst mere marketing does not qualify as an itinerant trade the sale of securities does so qualify. For sales visits regard must also be had to the special provision in section 1 of the Act Regarding Revocation of Door to Door and Similar Dealings, according to which an investor may revoke a contract within a period of one week (for closed-ended funds) or two weeks (for open-ended funds) if the following requirements are met: - the investor is induced to conclude the contract by negotiations at work, home, during leisure activities, in public areas or on public transportation; and - the solicitation had not been requested by the investor. Section 1 of the Act Regarding Revocation of Door to Door and Similar Dealings does not apply if the investor is contracting in the performance of an independent professional activity. “Road shows” or other group seminars/presentations in Germany: There is generally no objection to organising roadshows or other presentations in Germany, provided that the speeches held and the materials distributed do not infringe any statutes or principles under German law. However, in order to stay within the scope of a private placement, only previously known potential investors should be permitted to attend such roadshows. Calling investors by telephone: Marketing by telephone is characterised as illegal cold calling if all of the following elements are fulfilled: - a representative, agent, merchant or other professional offers by telephone goods or services which includes shares in foreign investment funds ; and - the telephone call has not been requested by the customer; and - the customer has not declared his explicit or implied consent to telephone marketing. Case law states that it is illegal both to announce telephone marketing in writing, and to prepare sales visits by uninvited telephone calls. Any uninvited telephone call is an illegal interference in the telephone holder's privacy. This rule also applies if a person who is already in contractual relations with a company is called by telephone to market further or new products of the company. Only telephone calls connected with existing contracts do not infringe section 1 of the Law Against Unfair Competition. These rules generally apply to telephone marketing directed both to private and institutional investors. The implied consent of an investor to telephone marketing can be assumed if he either had a business relationship with the marketing company before, or where the telephone marketing is in the investor’s best interest. Since institutional investors are usually interested in obtaining information on investment funds, an implied consent can virtually always be assumed and, therefore, the requirements for telephone marketing to institutional investors are not as restrictive as for private persons. Would the shares/limited partnership interests be able to be issued to an individual who applied on a wholly unsolicited basis? Yes. The issuance of shares/limited partnership interests to an individual who applied on a wholly unsolicited basis would not conflict with the principles governing private placements under German law. AIMA Special Report: Marketing Hedge Funds (France, Germany, Switzerland, UK) © Simmons & Simmons, 1999 10
  • 11. Are there any advantages in having the shares/limited partnership interests listed on an exchange (such as the Irish and/or Luxembourg Stock Exchange)? Shares in a foreign investment fund which are admitted to listing on a German stock exchange and fall under the conditions set forth in section 17 of the Foreign Investment Companies Act will generally enjoy favourable tax treatment. The listing of the shares as such would not be deemed to imply publicity. Publications required by the stock exchange will not be deemed to constitute a public offering. Any other marketing, i.e. publications not required by the exchange rules, is prohibited. If a foreign investment fund is already officially listed on a stock exchange within the European Community or in the European Economic Area, there are some reliefs available with respect to the official listing of its shares in Germany. Can marketing which is conducted on a private placement basis rely on English language documentation or is there any requirement to make German translations available? There are no specific requirements for a prospectus/offering memorandum used in a private placement to be in German. However, if the potential investor's command of the English language is not sufficient to fully understand the prospectus/offering memorandum, liability may arise under the principle of prospectus liability. The information contained in the prospectus/offering memorandum must be correct in all respects and complete in order to provide the potential investor with all information he reasonably needs in making an investment decision. Is a “negative clearance” route available by which the regulatory authorities will confirm that, if conducted in a particular way, the marketing of the shares/limited partnership interests will not infringe local marketing rules and regulations? It is, in principle, possible to contact the German Federal Supervisory Office for Securities Trading in order to check whether or not the intended manner of distribution, in its opinion, qualifies as a private placement. An informal inquiry could probably be processed within a relatively short period. However, there does not exist a formal procedure for negative clearances and, therefore, no right to request a binding confirmation in this respect. If the prospectus/offering memorandum were only distributed on a private placement basis, should it contain any specific wording drawing attention to this? It might be helpful if the prospectus/offering memorandum expressly indicates that it is confidential and for the information of the addressee only and must not be circulated to other people. However, such wording is not sufficient to qualify an offering as a private placement. If, for instance, a bank displays the prospectus/offering memorandum in its business premises accessible to all of its customers this will be construed as a public offering notwithstanding the above remarks. In addition, it should be noted that, even if the placement is strictly private, the issuer of the offering memorandum and the entity managing the fund will be subject to prospectus liability under German law. Accordingly, the information contained in the prospectus/offering memorandum must be correct in all respects and complete in order to provide the potential investor with all information he reasonably needs when making his investment decision. AIMA Special Report: Marketing Hedge Funds (France, Germany, Switzerland, UK) © Simmons & Simmons, 1999 11
  • 12. SWITZERLAND* * Pending update of this report, please note that the Swiss regulations have been amended since publication of this report in 1999. Are there established rules or guidelines which distinguish between a public offering and a private placement? The marketing of shares or interests in investment funds in Switzerland is governed by the Swiss Federal Law on Mutual Fund which came into force on January 1, 1995 (the "1995 Law"), supplemented by two Implementing Ordinances issued respectively by the Federal Council and by the Federal Banking Commission (the "Banking Commission"). In addition, regard must be had to three Directives issued by the Banking Commission in March, April and May 1995. The 1995 Law defines foreign investment funds in a variety of ways and the definition is sufficiently wide to cover unit trusts, open-ended investment companies, SICAVs, fonds communs de placement and mutual funds. The 1995 Law distinguishes in its Article 44 the following categories of foreign investment funds:- (a) pools of assets created pursuant to a collective investment contract (or other type of contract with the same effect) and managed by a management company whose registered office and administrative headquarters are outside Switzerland; (b) companies whose registered office and administrative headquarters are outside Switzerland and whose objective is collective investment, provided that an investor has the right to require the company itself or a company associated with it to redeem his shares; (c) any other foreign pools of assets or foreign companies which are subject to supervision in their home country as investment funds (to the extent that interests in them are marketed or distributed in Switzerland). A limited partnership is likely to be caught by the definition in paragraph (a) above if the limited partnership agreement is to be interpreted as a "collective investment contract or another type of contract having the same effect" and if the general partner itself manages the investments of the partnership or delegates this function to another company. Alternatively, a limited partnership could be caught by the definition in paragraph (c) if it constitutes a "foreign pool of assets" and if it is supervised as an investment fund in the jurisdiction in which it is established. The 1995 Law does not expressly refer to "closed-ended funds". Hence, it is unclear whether "closed-ended funds" qualify as foreign funds under the 1995 Law. The Banking Commission has indicated in a writing in 1996 that three different categories of "closed-ended funds" should be distinguished : a) "Closed-ended funds" which are subject to standards of supervision as investment funds in their home country comparable to those applicable in Switzerland. These funds may obtain a licence authorising the distribution of their shares in Switzerland, provided that the licence requirements are met; b) "Closed-ended funds" which are subject to standards of supervision which are not considered comparable to those applicable to investment funds in Switzerland. In such case, no licence may be obtained; AIMA Special Report: Marketing Hedge Funds (France, Germany, Switzerland, UK) © Simmons & Simmons, 1999 12
  • 13. c) "Closed-ended funds" which are not subject to supervision as investment funds in their home country. As these foreign funds do not fall within the definition of "foreign funds" contained in Article 44 of the 1995 Law, their distribution is not restricted, provided, however, that the investment vehicles in question are not designated as "investment funds" or a similar expression which may cause deception or confusion. It follows from the foregoing that if a "closed-ended fund" is subject to supervision as an investment fund in its country of incorporation, the provisions of the 1995 Law are applicable. Conversely, shares or interests in a "closed-ended fund" which is not subject to supervision in its country of corporation may be distributed without any licence requirement, provided that no expression such as "fund" or "investment fund" is used. Offerings subject to licence: According to Article 45 of the 1995 Law, any person who "offers or distributes shares in foreign funds, on a professional basis, in or from Switzerland" must be licensed to that effect by the Banking Commission. A licence is required where: a) the foreign investment vehicle qualifies as a foreign investment fund (see above); and b) the shares in the foreign fund are offered or distributed on a professional basis in or from Switzerland (see below); and c) the activities conducted in Switzerland do not benefit from the institutional investors exemption (see below). The relevant criteria for the determination of what constitutes an offering or distribution and what is meant by "on a professional basis" are discussed below. The institutional investors exemption: An amendment to the Federal Council's Implementing Ordinance to the 1995 Law, which came into force on 1 November 1997, provides for an exemption for certain marketing activities to institutional investors. This amendment allows offerings or distribution of foreign investment funds in or from Switzerland without a licence, to the extent that such offerings or distribution are addressed exclusively to investors whose assets are managed professionally (e.g., banks, insurance companies, pension funds, etc.) and that no public offer is made. By this amendment, the concept of "public offer" as known under the previous Swiss legislation has been reinstated with respect to offerings or distribution to institutional investors. The Banking Commission has indicated that the purpose of this exemption is to allow offerings or distribution, road shows, etc. addressed to a limited number of potential institutional investors. The concept of professional offer or distribution: Marketing activities carried out in Switzerland are subject to a licence requirement if (a) an "offering or distribution" of shares of foreign funds takes place in or from Switzerland; and (b) such "offering or distribution" is made "on a professional basis". It is important to note in this connection that the Banking Commission considers the concept of "offering or distribution on a professional basis" to be broader than the concepts of "public offer" and "public solicitation" as known under previous legislation. Accordingly, as a rule, any form of "advertising" of a foreign fund will be subject to a licence requirement. No private placement exemption, as known in other jurisdictions, is available in respect of the offering or distribution of foreign funds in Switzerland, except for the professional investors exemption described above. The first element of "offering or distribution" is broadly construed by the Banking Commission, which considers that any form of promotion of shares in a foreign investment fund in Switzerland or directed at investors or potential investors in Switzerland will be subject to a licence AIMA Special Report: Marketing Hedge Funds (France, Germany, Switzerland, UK) © Simmons & Simmons, 1999 13
  • 14. requirement (unless the institutional investors exemption is available). However, the Banking Commission has indicated in writing that marketing or distribution activities will only constitute "advertising" if directed at investors or potential investors (e.g. the placing of shares in a foreign fund with a Swiss bank which subscribes for its own account; the organisation of public meetings or meetings with the press; or the distribution of prospectuses to potential investors). Conversely, a foreign fund or its selling agent will not, according to the Banking Commission, be subject to a licence requirement if it limits its marketing activities to sending a prospectus to, or meeting with, Swiss banks or financial institutions which are not themselves potential investors, provided that no public offer is made. In the absence of a definition of the phrase "on a professional basis" in the legislation, the Banking Commission issued guidelines in 1996 outlining what it regards as cases typically requiring or not requiring licences as the case may be. Summarising these guidelines, Swiss banks and financial institutions will not be considered to be offering or distributing shares in a foreign investment fund "on a professional basis" so long as the following conditions are met : (a) no formal distribution agreement exists between the Swiss bank or financial institution and the fund; and (b) the customer on his own initiative issues a purchase or subscription order for shares in a foreign investment fund without any recommendation to that effect from the Swiss bank or financial institution; or (c) shares are placed by the Swiss bank or financial institution in customers' discretionary accounts which it manages, provided that shares of the same fund are not systematically acquired for those accounts; and (d) shares in the foreign investment fund are not advertised. It will be noted that the criteria described above relate only to the position of Swiss banks and financial institutions. They do not deal with the circumstances in which a foreign investment fund or its selling agent will not be considered to be marketing or distributing shares in the fund in Switzerland on a professional basis, and hence not subject to the licence requirement, when the fund or its selling agent promotes shares to Swiss banks and financial institutions. The Banking Commission has thus far consistently refused to indicate a "magic figure" of (potential) investors who could be contacted without a licence, even in the scope of the institutional investors exemption. It results, in sum, from the foregoing that the following marketing activities may be carried out in or from Switzerland without a licence: - offerings, road shows, group seminars/presentations addressed to a limited number of investors whose assets are managed professionally (e.g. banks, insurance companies, pension funds, etc.), provided that no public offer is made; or - sending a prospectus to, or meeting with, banks or financial institutions which are not themselves potential investors (in other words, if they are not subscribing for their own account, but solely for the account of their customers), provided that no public offer is made. In such case, marketing or distribution of interests in foreign funds would be the responsibility of the banks or financial institutions who may be required to obtain a licence. This would, for example, apply in cases of systematic placement of interests in the Fund in customers' discretionary accounts managed by the banks or financial institutions. AIMA Special Report: Marketing Hedge Funds (France, Germany, Switzerland, UK) © Simmons & Simmons, 1999 14
  • 15. Which, if any, of the following categories of person in Switzerland could be contacted direct by the fund/general partner, the investment manager or by their respective representatives:- (a) individual investors; (b) institutional investors (e.g. large corporates and funds of funds); (c) pension funds; (d) insurance companies? No direct contacts aimed at marketing foreign funds may be made on an unsolicited basis in or from Switzerland with individual investors in the absence of a licence of the Banking Commission. An exemption with respect to institutional investors was brought about on 1 November 1997 by the enactment of an amendment to the Implementing Ordinance of the Federal Council. This amendment allows offerings or distributions of shares of foreign funds without a licence to Swiss institutional investors, as long as no public offer is made in or from Switzerland for such funds. The term "institutional investors" is defined as entities whose assets are managed professionally, i.e. Swiss banks, insurance companies, pension funds, etc. The Banking Commission has indicated that this exemption is to be understood to allow offerings or distribution addressed to a limited number of potential institutional investors. Would the fund/general partner or the investment manager be able to gain access to individual investors by, for example, marketing the shares/limited partnership interests to banks who act on a discretionary basis for their customers? Yes, the fund/general partner, the investment manager and/or the respective selling agents would within prescribed limits be able to gain access to individual investors by marketing shares/limited partnership interests to Swiss banks or financial institutions who act on a discretionary basis for their customers, provided that no public offer is made. Such marketing activities should be limited to sending a prospectus or meeting with Swiss banks or financial institutions. No mass mailing should be made. It should be stressed that no distribution agreement should be entered into between the fund and the bank or financial institution, and that shares of the same fund may not be systematically acquired for those accounts. Is there a numerical limit on the number of investors who may be approached or may invest in the shares/limited partnership interests? Does this limit differ according to the person who conducts the marketing? Neither the 1995 Law nor the amendment to the Implementing Ordinance of the Federal Council providing for an "institutional investors exemption" refer to a numerical limit. As mentioned above, the Banking Commission has consistently refused thus far to indicate a "magic number" of (potential) investors who could be contacted without a licence, even within the scope of the institutional investors exemption. It may be noted, however, that in Swiss legislation concerning banks and securities dealers, the concept of "public offer" consistently refers to a maximum of 20 customers. AIMA Special Report: Marketing Hedge Funds (France, Germany, Switzerland, UK) © Simmons & Simmons, 1999 15
  • 16. Assuming that some form of marketing is permissible, which of the following activities would be permitted:- (a) mailing the prospectus/offering memorandum and other marketing material to investors; (b) the fund/general partner or the investment manager’s representatives meeting with potential investors in Switzerland; (d) “road shows” or other group seminars/presentations in Switzerland; (e) calling investors by telephone? These forms of marketing are admissible provided that they take place either at the unsolicited request of a potential investor or within the ambit of the institutional investors exemption. Road shows or group seminars/presentations are admissible within the institutional investors exemption, i.e. provided that they are made to representatives of a limited number of institutional investors. Calling potential investors by telephone will be qualified as a public offer, subject to licence from the Banking Commission, unless the calls are made to a limited number of banks or financial institutions which are not themselves potential investors. Are there any provisions which would render it unlawful for an investor to invest in the shares/limited partnership interests? There is no general provision of Swiss law which would render it unlawful for an individual investor to invest in the shares/limited partnership interests. Would the shares/limited partnership interests be able to be issued to an individual who applied on a wholly unsolicited basis? Yes, the shares/limited partnership interests would be able to be issued to an individual investor who applied on an unsolicited basis. It would be advisable to document the unsolicited request by means of written instructions emanating from the individual investor. Are there any advantages in having the shares/limited partnership interests listed on a stock exchange (such as the Irish and/or Luxembourg Stock Exchange)? From a regulatory point of view, there is no advantage to having the shares/limited partnership interests listed on a stock exchange. Can marketing which is conducted on a private placement basis rely on English language documentation or is there any requirement to make Swiss translations available? As mentioned above, no private placement exemption, as known in other jurisdictions, is available in Switzerland. Offerings of shares/limited partnership interests within the scope of the institutional investors exemption or addressed to banks or financial institutions who may AIMA Special Report: Marketing Hedge Funds (France, Germany, Switzerland, UK) © Simmons & Simmons, 1999 16
  • 17. subscribe or purchase shares for placement in their customers' discretionary accounts - provided that no public offer is made - may rely on English language documentation. The translation of the documentation into a Swiss official language is required only within the context of an application for a licence for marketing in Switzerland. Is a “negative clearance” route available by which the regulatory authorities will confirm that, if conducted in a particular way, the marketing of the shares/limited partnership interests will not infringe local marketing rules and regulations? The interpretation by the Banking Commission of the 1995 Law and its Implementing Ordinances as well as the guidelines from time to time issued by the Banking Commission are inconsistent. Hence, as a rule, no negative clearance is needed before conducting marketing activities which do not amount to an offering or distribution "on a professional basis", or which fall within the scope of the institutional investors exemption. The Banking Commission is unwilling to allow exceptions to its consistent practice by way of negative clearance. However, it is recognised that the concepts of "offering or distribution on a professional basis" and "systematic placement" as well as that of "public offer" referred to in the institutional investors exemption are not precisely defined and may leave room for interpretation. A negative clearance route is available where the criteria mentioned in the guidelines issued by the Banking Commission are insufficient to determine whether a proposed offering may be conducted without a licence (i.e. does not amount to a public offer), in other words where there is a grey area. It should be noted that a request for negative clearance must contain all details of the proposed marketing of shares/limited partnership interests, with indication of names of the fund, its selling agent, the number of potential investors concerned, the method of marketing envisaged, etc. The policy of the Banking Commission is not to issue any general negative clearance on a "no name basis". If the prospectus/offering memorandum were only distributed on a private placement basis, should it contain any specific wording drawing attention to this? Although no guidelines have been issued by the Banking Commission with respect to a warning legend in prospectuses of foreign funds, the following legend to be useful to warn potential investors: “The Fund has not been authorised by the Swiss Federal Banking Commission as a foreign investment fund under Article 45 of the Swiss Federal law on investment funds of March 18, 1994. Accordingly, interests in the Fund may not be offered or distributed on a professional basis in or from Switzerland, and this Memorandum may not be issued in connection with any such offer or distribution. Interests in the Fund may, however, be offered and this Memorandum may be distributed in Switzerland on a professional basis to a limited number of professional investors in circumstances such that there is no public offer.” AIMA Special Report: Marketing Hedge Funds (France, Germany, Switzerland, UK) © Simmons & Simmons, 1999 17
  • 18. UNITED KINGDOM Are there established rules or guidelines which distinguish between a public offering and a private placement? Yes, but only in relation to closed-ended investment companies since such companies fall outside the definition of “collective investment scheme”. If the marketing of shares in a closed-ended investment company to persons in the UK were to constitute an offer of securities to the public in the UK, it would be necessary to prepare a prospectus in accordance with the Public Offers of Securities Regulations 1995 (the “POS Regulations”). An offer of securities is made to the public if it is made to the public and none of the exceptions set out in paragraph 7 of the POS Regulations applies in relation to the offer. The POS Regulations do not provide an exhaustive definition of “public” for this purpose, but do provide that an offer which is made to any section of the public, whether selected as members of a body corporate or as clients of the person making the offer, or in any other manner, is to be regarded as made to the public. Only offers made to persons in the UK are taken into account, and any part of an offer made to persons outside the UK is disregarded when determining whether an offer is made to the public. Given the wide definition of “public”, the fund and the investment manager must ensure that any marketing activities in the UK are restricted so that reliance can be placed on one or more of the principal relevant exceptions set out in paragraph 7 of the POS Regulations. The principal relevant exceptions in paragraph 7 of the POS Regulations are likely to be the “professionals’” exception, the “no more than 50 persons” exception and the “minimum consideration” exception. The professionals’ exception will apply and an offer of shares in the fund will not constitute an offer of shares to the public where they are offered to persons: (a) whose ordinary business involves them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses; or (b) who it is reasonable to expect will acquire, hold, manage or dispose of investments (as principal or agent) for the purposes of their businesses; or are otherwise offered to persons in the context of their trades, professions or occupations. This exception applies to offers made to a wide range of professional investors and includes not only those in “financial” businesses such as securities dealers and fund managers but also the treasury and investment functions of industrial companies and financial institutions (of whatever size). In addition, an offer of shares in the fund will not constitute an offer of shares to the public in the UK if the shares are offered to no more than 50 persons. In counting the number of persons to whom an offer is made, offers to persons who are outside the UK or who fall within one of the other exceptions (eg the professionals’ exception) can be disregarded. In other words, the professionals’ exception and the no more than 50 persons exception are cumulative so that an offer can be made to any number of professionals (as defined) and 50 or fewer non- professionals without giving rise to an offer of securities to the public in the UK. AIMA Special Report: Marketing Hedge Funds (France, Germany, Switzerland, UK) © Simmons & Simmons, 1999 18
  • 19. However, it is crucial to appreciate that it is the number of persons to whom an offer is made which is relevant, not the number who accept an offer. In other words, the number of persons in the UK (a) to whom the prospectus/offering memorandum and any other promotional document may be sent and (b) who are offered shares in the fund during a personal visit or verbal communication (eg by telephone) must not exceed 50 in aggregate. Moreover, the POS Regulations do not specify in what capacity (agent or principal) the offeree must be acting. The better view is that those who count towards the 50 person total are those recipients of the offer who are able to respond to it without reference to another person. For example, if an offer is made to one person with a view to it being communicated to several other persons for their consideration, then those others count towards the 50 person total; but an offer to a discretionary fund manager is an offer to one person, notwithstanding that he may choose to accept the offer on behalf of many clients. In addition, an offer made to several persons jointly, such as trustees or the members of a partnership in their capacity as such, is an offer to a single person. Lastly, an offer of shares in the fund will not constitute an offer of shares to the public in the UK if the minimum consideration which may be paid by any person for shares acquired by him pursuant to the offer is Euro 40,000 (or an equivalent amount in another currency). Which, if any, of the following categories of person in the United Kingdom could be contacted direct by the fund/general partner, the investment manager or by their respective representatives:- (a) individual investors; (b) institutional investors (e.g. large corporates and funds of funds); (c) pension funds; (d) insurance companies? The restrictions applicable to the marketing of a fund in the UK differ depending upon whether the fund is a collective investment scheme (the definition of which includes an open-ended investment company and an open-ended or closed-ended limited partnership) or a closed- ended investment company, and upon whether the fund is being marketed by a person who is authorised under the Financial Services Act 1986 (“FSA”) or by a person who is not authorised under the FSA. Marketing by Unauthorised Persons The fund may, whether it is a collective investment scheme or a closed-ended investment company, subject to the restrictions and exceptions described below and assuming in the case if a closed-ended investment company that there is no offer to the public (see above), be marketed in the UK without the need for the fund/general partner or the investment manager to obtain authorisation under the FSA, provided that neither the fund/general partner nor the investment manager does so from a permanent place of business maintained by it in the UK and that reliance is placed on the overseas person exemption. The fund/general partner and the investment manager will qualify as an overseas person for this purpose provided that it does not carry on investment business for the purposes of the FSA from a permanent place of business maintained by it in the UK. The overseas person exemption is contained in paragraph 27 of Schedule 1 to the FSA and provides that an overseas person’s activities of offering or agreeing to sell investments as agent to a person in the UK, offering or agreeing to arrange deals in investments for a person in the UK or giving a AIMA Special Report: Marketing Hedge Funds (France, Germany, Switzerland, UK) © Simmons & Simmons, 1999 19
  • 20. person in the UK investment advice will not constitute regulated investment business if the transaction, offer, agreement or advice is the result of: (a) an approach made to the overseas person by or on behalf of the person in the UK which either has not been in any way solicited by the overseas person or has been solicited by him in a way which has not contravened Section 56 of the FSA (which deals with cold calling) or Section 57 of the FSA (which deals with the issue of investment advertisements); or (b) an approach made by the overseas person which has not contravened either Section 56 or Section 57 of the FSA. Restrictions on Advertising: Section 57(1) of the FSA provides that no person other than an authorised person may issue or cause to be issued an investment advertisement in the UK unless its contents have been approved by an authorised person. An investment advertisement is widely defined for this purpose to mean “any advertisement inviting persons to enter or offer to enter into an investment agreement [which would include an agreement to subscribe for shares/limited partnership interests in the fund] … or containing information calculated to lead directly or indirectly to persons doing so”. Accordingly, the fund's prospectus/offering memorandum, any other promotional document and any letter under cover of which it or they are distributed by the fund/general partner or the investment manager to persons in the UK will constitute “investment advertisements” for the purposes of Section 57 of the FSA. Breach of Section 57 of the FSA is a criminal offence which is punishable on indictment by a term of up to 2 years’ imprisonment and an unlimited fine. In addition, any person who entered into an investment agreement such as an agreement to subscribe for shares/limited partnership interests in the fund as a result of a contravention of Section 57 may be entitled to rescind his subscription and to claim compensation. The fund/general partner and the investment manager will, however, be able to take advantage of certain exceptions from the Section 57 restriction on advertising which are contained in Orders made by the Secretary of State under the FSA. Exceptions to the Restrictions on Advertising: The principal relevant exceptions are contained in the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 (the “Exemptions Order”). The Exemptions Order provides that an unauthorised person (such as the fund/general partner and the investment manager) may issue investment advertisements (such as the prospectus/offering memorandum and any other marketing document and covering letter) to any person in the UK whom it reasonably believes to fall within any of the following categories: (a) persons authorised under the FSA to carry on investment business in the UK. This will include merchant banks, stockbrokers, securities houses, investment managers, insurance companies and financial intermediaries; (b) European investment firms carrying on home-regulated business in the UK under the European passport for investment business provided by the Investment Services Directive or the Second Banking Coordination Directive; (c) persons who are exempt form the requirement for authorisation under the FSA. This will include banks who appear on the Bank of England’s list of wholesale money market institutions, as well as Lloyd’s underwriting agents as respects investment business carried on by them in connection with or for the purpose of insurance business at Lloyd’s. There are, however, proposals which will shortly require Lloyd’s managing agents to become persons authorised under the FSA. AIMA Special Report: Marketing Hedge Funds (France, Germany, Switzerland, UK) © Simmons & Simmons, 1999 20
  • 21. (d) a body corporate which either: (i) has more than 20 shareholders or is the subsidiary of a holding company which has more than 20 shareholders and it, or any of its holding companies or subsidiaries, has a called-up share capital or net assets of at least £500,000;or (ii) if it is a body corporate having less than 20 shareholders and is not the subsidiary of a holding company which has more than 20 shareholders, it or any of its holding companies or subsidiaries, has a called-up share capital or net assets of at least £5 million; (e) an unincorporated association (for example, a partnership) having net assets of not less than £5 million; (f) a United Kingdom local or public authority; (g) a trustee of a trust where the aggregate value of the cash and investments which form part of the trust’s assets (before deducting the amount of its liabilities) is £10 million or more or has been £10 million or more at any time during the previous two years. This will cover the trustees of pension funds of any significant size; (h) a person acting in his capacity as a director, officer or employee of an entity of a type described in paragraph (a) to (f) above (ie he must not be acting on his own personal account) whose responsibilities, when acting in his capacity as a director, officer or employee of such an entity, involve him in engaging in investment business activities as defined in the FSA; (i) persons who are existing shareholders in the fund if it is an open-ended investment company, provided that the advertisement contains no invitation or information which would make it an investment advertisement other than an invitation or information relating to shares in the fund. This will only be relevant after the close of the initial offer period; and (j) any person to whom the fund/general partner or the investment manager has, in the course of carrying on investment business, effected or arranged for the effecting of a transaction or given investment advice in each case within a period of 12 months prior to the issue of the relevant investment advertisement and where the relevant transaction or advice was effected or arranged or given at a time when the recipient was neither resident nor had a place of business in the UK. The prospectus/offering memorandum, any other promotional document and any covering letter may be sent to any persons whom the fund/general partner or the investment manager reasonably believes to fall within any of the categories referred to at (a) to (i) above. The standard of reasonable belief requires that some enquiry be made in cases of any doubt in order to ascertain (for example, in the case of a body corporate) the adequacy of its net assets or called-up share capital, for example by obtaining copies of its most recently published accounts. In respect of category (j) above, the prospectus/offering memorandum, any other promotional document and any covering letter may only be sent to persons who actually fall within that category – reasonable belief is not sufficient. It is important to note that there is no exemption available to the fund/general partner or the investment manager in relation to “sophisticated” or “high net worth” individuals as such. Accordingly, save in the circumstances mentioned in categories (i) and (j) above, no individual in his private capacity may be sent a copy of the prospectus/offering memorandum, any other promotional document or any covering letter by the fund/general partner or the investment AIMA Special Report: Marketing Hedge Funds (France, Germany, Switzerland, UK) © Simmons & Simmons, 1999 21
  • 22. manger, nor should such persons by the subject of unsolicited telephone contact or personal visits. Restrictions on Cold Calls: Section 56 of the FSA states that no person shall in the course of, or in consequence of, any unsolicited call made on a person in the UK or made from the UK on a person elsewhere, by way of business, enter into an investment agreement with the person on whom the call is made or procure or endeavour to procure that person to enter into such an agreement. For the purposes of Section 56 an “unsolicited call” means a personal visit or oral communication made without “express invitation”. Unsolicited mail is not therefore covered by Section 56. Section 56 covers unsolicited calls made on a person in the UK even if the call originates outside the UK and thus restricts the extent to which an overseas person may market investments in this way. Accordingly, if representatives of the fund/general partner or the investment manager were to make personal visits or oral communications (for example, by telephone) to persons in the UK without their express invitation, these would constitute unsolicited calls. Although unsolicited calls are not prohibited as such and Section 56 does not create a criminal offence, it renders any investment agreement concluded as a result of the unsolicited call unenforceable by the caller. Accordingly, any subscription for shares/limited partnership interests in the fund made by a person in the UK as a result of an unsolicited call by representatives of the fund/general partner or the investment manager would be unenforceable and, in addition, the person called would be entitled to recover any money paid in subscribing for shares/limited partnership interests in the fund, together with compensation (for example, to reflect loss of interest) for any loss suffered as a result. Exceptions to the Restrictions on Cold Calls: There are certain exceptions to the cold calling restrictions described above. These are set out in the Common Unsolicited Calls Regulations 1991 (the “Regulations”). The principal relevant exception in the Regulations is that an overseas person, such as the fund/general partner or the investment manager, may make unsolicited calls on a “non-private customer”. This exception allows the fund/general partner or the investment manager to procure or endeavour to procure a person to purchase shares/limited partnership interests in the fund if the call is made with a view to the investor purchasing shares as a non-private customer. However, the caller must be able to demonstrate that he believes on reasonable grounds at the time of the call that the exception is available. A non-private customer for this purpose includes an individual, but only if he is acting in the course of investment business, and a body corporate, a partnership or a trustee acting for a trust which meets certain size requirements enabling the body corporate, partnership or trustee to be treated as an “ordinary business investor”. The relevant size requirements for an “ordinary business investor” are: (a) in the case of a body corporate which has more than 20 shareholders or is the subsidiary of a holding company which has more than 20 shareholders where it, or any of its holding companies or subsidiaries, has a called-up share capital or net assets of £500,000 or more; (b) in the case of a body corporate which has less than 20 shareholders and is not the subsidiary of a holding company which has more than 20 shareholders, where it, or any of its holding companies or subsidiaries, has a called-up share capital or net assets of £5 million or more; (c) in the case of a partnership, where it has net assets of £5 million or more; or AIMA Special Report: Marketing Hedge Funds (France, Germany, Switzerland, UK) © Simmons & Simmons, 1999 22
  • 23. (d) in the case of a trustee of a trust, where the aggregate value of the trust’s assets (before deducting the amount of its liabilities) is £10 million or more or has been £10 million or more at any time during the previous two years. The Regulations would therefore allow the fund/general partner and/or investment manager to make unsolicited calls on persons falling within sub-paragraphs (a) to (g) above in relation to the exceptions from the restrictions on advertising without triggering the unenforceability of any subscription for shares/limited partnership interests in the fund by such persons. Marketing by an Authorised Person In the event that the investment manager is authorised under the FSA (which will be the case with UK-based hedge fund managers), it will be able to market shares/limited partnership interests in the fund, if it is a collective investment scheme (an “unregulated scheme”), to wider categories of person than those to whom an unauthorised person may market the fund by virtue of Section 76 of the FSA. Restrictions on Advertising: Section 76 of the FSA provides, in summary, that advertisements which invite persons to become or offer to become, or contain information calculated to lead directly or indirectly to persons becoming, participants (ie shareholders or limited partners) in an unregulated scheme, may not be issued in the UK by an authorised person and that authorised persons may not advise or procure any person in the UK to become or offer to become a participant in such a scheme, subject in either case to a number of exceptions set out in Section 76(2) of the FSA and contained in regulations issued by the Financial Services Authority (formerly the SIB) under Section 76(3) of the FSA. Breach of Section 76 is not a criminal offence. Section 95 of the FSA provides, however, that a breach of Section 76 by an authorised person is to be treated as a breach of the conduct of business rules to which it is subject. Such a breach may therefore give rise to an action for damages under Section 62 of the FSA (where the fund is promoted to private investors) and to disciplinary action by its regulator. Exceptions to the Restrictions on Advertising: Section 76(2) of the FSA will allow the investment manager to market shares/limited partnership interests in the fund to other persons authorised under the FSA and to persons whose ordinary business involves the acquisition and disposal of property of the same kind as the property, or a substantial part of the property, to which the fund relates. More usefully, the Financial Services (Promotion of Unregulated Schemes) Regulations 1991 issued by the Financial Services Authority under Section 76(3) of the FSA will permit the investment manager to market shares in the fund, inter alia, to prospective UK investors whom it reasonably believes fall within one or more of the following categories: (a) Existing shareholders/limited partners in the fund and certain other schemes: The fund may be promoted to existing shareholders/limited partners in the fund (which will only be relevant after the end of the initial offer period) and existing shareholders/limited partners in other unregulated schemes whose underlying property and risk profile are both substantially similar to that of the fund. For this purpose, the risk profile of another unregulated scheme will be treated as substantially similar to that of the fund only if there is such similarity in relation to both liquidity and volatility. (b) Former shareholders/limited partners: The fund may be promoted to persons who, within the last 30 months, have been shareholders/limited partners in the fund (again this will not be relevant until after the end of the initial offer period) or AIMA Special Report: Marketing Hedge Funds (France, Germany, Switzerland, UK) © Simmons & Simmons, 1999 23
  • 24. in another unregulated scheme whose underlying property and risk profile are both substantially similar to that of the fund, as described in (a) above. (c) Established customers of the investment manager: The fund may be promoted to established customers of the investment manager, being customers who have been and remain an actual customer in relation to investment business done with or through the investment manager, provided that reasonable steps have been taken to ensure that an investment in the fund is suitable for such customers after having sought information about their circumstances and investment objectives. (d) Newly accepted customers: The fund may be promoted to newly accepted customers of the investment manager, subject to the same proviso as in (c) above, and provided further that a written agreement exists between such person and the investment manager relating to investment business to be done between them and such agreement was entered into without any breach of Section 76 of the FSA or any applicable conduct of business rules. (e) Non-private customers of the investment manager: The fund may be promoted to non-private customers of the investment manager, being essentially persons who are not private customers, as well as persons who would otherwise be private customers but who are reasonably believed to have sufficient experience and understanding to be treated, and who have given their written consent to be treated, as non-private customers. It should be noted, however, that the investment manager may not send a copy of the prospectus/offering memorandum to the wider categories of person to whom, as an authorised person, it is permitted to market shares/limited partnership interests. It may only send the prospectus/offering memorandum to the same categories of person to whom it may be sent by the fund/general partner, as an unauthorised person (as described above). The investment manager may, however, issue the prospectus/offering memorandum to the wider categories of persons by issuing it as its own document by appending it to a “UK wrapper” which complies with the rules of its regulatory authority relating to the contents of investment advertisements. Exceptions to the Restrictions on Cold Calls: Exceptions to the cold calling restrictions described above apply in relation to authorised persons. The principal relevant exceptions in the Regulations are that an authorised person, such as the investment manager, may make unsolicited calls on existing customers and non-private investors. An existing customer of the investment manager for this purpose is a customer who has a legitimately established existing customer relationship with the investment manager or one of its associates, and the customer relationship is such that the customer envisages receiving unsolicited calls. The exception for non-private investors would allow the investment manager to procure or endeavour to procure a person to purchase shares/limited partnership interests in the fund if the call is made with a view to the investor purchasing shares/limited partnership interests as a non- private investor. However, the investment manager must be able to demonstrate that it believes on reasonable grounds at the time of the call that the exception is available. A non-private investor for this purpose includes an individual (but only if he is acting in the course of carrying on investment business) and any company, partnership or trust. AIMA Special Report: Marketing Hedge Funds (France, Germany, Switzerland, UK) © Simmons & Simmons, 1999 24
  • 25. Would the fund/general partner or the investment manager be able to gain access to individual investors by, for example, marketing the shares/limited partnership interests to banks who act on a discretionary basis for their customers? Yes, since whether the marketing is carried out by an authorised person or by an unauthorised person, the shares/limited partnership interests may be marketed to persons who are authorised under the FSA which would include banks acting on a discretionary basis for their customers. In neither case, however, would the banks be permitted to pass on the prospectus/offering memorandum to their customers. Is there a numerical limit on the number of investors who may be approached, or may invest in the shares/limited partnership interests? Does this limit differ according to the person who conducts the marketing? No, except where the fund is a closed-ended investment company and reliance is placed on the “no more than 50 persons” exception to the POS Regulations. Assuming that some form of marketing is permissible, which of the following activities would be permitted:- (a) mailing the prospectus/offering memorandum and other marketing material to investors; (b) the fund/general partner or the investment manager’s representatives meeting with potential investors in the United Kingdom; (c) “road shows” or other group seminars/presentations in the United Kingdom; (d) calling investors by telephone? a) This is dealt with under Exceptions to the Restrictions on Advertising. b) Such meetings will be permissible so long as the fund/general partner or the investment manager can rely on the overseas person exemption if it is not authorised under the FSA (see above under Marketing by Unauthorised Persons) and, if the fund is closed- ended, no offer of shares to the public is made under the POS Regulations. If the investment manager is authorised under the FSA and the fund is open-ended, it may meet with potential UK investors so long as they fall within the categories of person to whom the shares/limited partnership interests may be marketed under Section 76(2) of the FSA and under the Financial Services (Promotion of Unregulated Schemes) Regulations 1991 (see above under Marketing by an Authorised Person). If the investment manager is authorised under the FSA and the fund is closed-ended, it may meet with potential investors in the UK so long as no offer of shares to the public is made under the POS Regulations. c) Such activities fall to be treated in the same way as meetings with potential investors in the UK. d) This is dealt with above under Exceptions to the Restrictions on Cold Calls. AIMA Special Report: Marketing Hedge Funds (France, Germany, Switzerland, UK) © Simmons & Simmons, 1999 25
  • 26. Would the shares/limited partnership interests be able to be issued to an individual who applied on a wholly unsolicited basis? Yes; however, Section 57 of the FSA and the Financial Services (Promotion of Unregulated Schemes) Regulations 1991 restrict the persons to whom the prospectus/offering memorandum may be sent and do not distinguish between investors who have, or have not, solicited a copy thereof. Are there any advantages in having the shares/limited partnership interests listed on a stock exchange (such as the Irish and/or Luxembourg Stock Exchange)? No, obtaining such a listing is of no advantage in terms of the restrictions on marketing under Section 57 of the FSA or under the Financial Services (Promotion of Unregulated Schemes) Regulations 1991. Can marketing which is conducted on a private placement basis rely on English language documentation? Yes. Is a “negative clearance” route available by which the regulatory authorities will confirm that, if conducted in a particular way, the marketing of shares/limited partnership interests will not infringe local marketing rules and regulations? Yes, but in practice it is rarely used. It involves seeking “advice” (in effect a form of private letter ruling) from the Financial Services Authority under Section 206 of the FSA. Such “advice”, whilst binding the Financial Services Authority, is not binding on the English courts. If the prospectus/offering memorandum were only distributed on a private placement basis, should it contain any specific wording drawing attention to this? If the fund is a collective investment scheme, the following legend should be included: “The Fund is an unregulated collective investment scheme for the purposes of section 76 of the Financial Services Act 1986 of the United Kingdom (the “Act”). This document has not been approved for the purposes of section 57 of the Act by a person authorised under the Act. Accordingly, this document may only be issued or passed on in the United Kingdom to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 or to a person to whom this document may otherwise be lawfully issued or passed on and it must not be reproduced or distributed or passed on to any other persons.” If the fund is a closed-ended investment company, the following legend should be included: “The Shares may not be, and are not being, offered to persons in the United Kingdom and this document may not be distributed in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995 of the United Kingdom. AIMA Special Report: Marketing Hedge Funds (France, Germany, Switzerland, UK) © Simmons & Simmons, 1999 26
  • 27. This document has not been approved for the purposes of section 57 of the Financial Services Act 1986 of the United Kingdom (the "Act”) by a person authorised under the Act. Accordingly, this document may only be issued or passed on in the United Kingdom to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 or to a person to whom this document may otherwise be lawfully issued or passed on and it must not be reproduced or distributed or passed on to any other persons” 29 October 1999  Simmons & Simmons Alternative Investment Management Association (AIMA) Lower Ground Floor, 10 Stanhope Gate, Mayfair, London W1K 1AL Tel +44 (0)207 659 9920 Fax +44 (0)207 659 9921 E-mail – info@aima.org Internet – http://www.aima.org AIMA Special Report: Marketing Hedge Funds (France, Germany, Switzerland, UK) © Simmons & Simmons, 1999 27

×