Selling US Funds in the EU Is Not Nearly As Complicated as It Seems

There is common misconception among US and other non-EU investment managers that selling their funds into the EU is risky or prohibitively complicated.  While this may have been partially true in the past, it is simply no longer the case.

Historically, due to the confusion and/or complexity of the EU, US managers used a fly-in, fly-out model where a manager would meet with prospective clients, discuss its strategies, and then look for the prospective client to ask for more information – effectively using reverse solicitation in each instance.

This type of marketing model – moderately effective at best – has never been without risk.  The marketing model operates in a grey area of the law that required record keeping and individual fact-based analysis to confirm reverse solicitation.  Marketing strategies just to induce reverse solicitation in a fund could always be seen as circumvention of marketing and passporting rules in the EU.

However, this legacy marketing model is no longer needed nor the corresponding worry, concern, or risk.  Due to recent changes to EU law and developments in the industry, US managers can use EU law to sell their funds, instead of avoiding it.

There are three straightforward options for US managers to gauge interest from potential EU investors and market and sell their funds.

What’s Changed?

Change to the EU landscape for marketing funds (including non-EU funds) occurred gradually and can be attributed, in a large part, to Brexit and the 2021 EU Cross Border Distribution rules (“CBD Rules”) which comprise of the Cross Border Distribution Regulation or “CBDR”, Cross Border Distribution Directive or “CBDD”, and local implementation of CBDD in each EU country.

This overall change is highlighted by two key points:

1. EU Regulators wanted, and implemented, concrete and prescriptive rules for how managers can “Pre-Market” their strategies and funds in the EU; and
2. Certain EU countries still wanted US and other non-EU managers to market their services directly.

Following Brexit, EU regulators began to privately, and then more publicly, denounced UK personnel from engaging in marketing activities in the EU through their EU-based affiliates.  EU regulators made it clear that all activities, such as marketing EU funds, should take place directly from the EU (i.e. where the EU regulators have full oversight).

Around the same time, the CBD Rules went into effect which specifically defined what Pre-Marketing is and created a corresponding regulatory framework for managers to gauge EU interest in their funds ahead of any passporting or registration.  As part of the CBD Rules, local countries had to implement their local rules, certain countries provided specific wording that allowed the Pre-Marketing of non-EU funds.

What was the result?

By understanding the rules of Pre-Marketing, the objective of EU regulators, and analyzing existing EU country’s local rules on private placement, US managers now have three clear paths for marketing US funds that utilize EU law, instead of trying to avoid it.

The Three Paths:

1. Non-Regulated Activities

a) What can you do?

• Market firm-level information, capabilities, & strategies;
• Provide marketing documents; and
• Virtually or in person.

b) Where?

• In all 27 EU Countries.

c) Items to Consider:

• Materials with Firm-level information, capabilities, & strategies are permitted.
• No conversations on existing or potential funds.
• Materials cannot include any fund information.
• You can provide information via genuine reverse solicitation (note, some countries are excluded), following requests for information on existing/potential US/Cayman funds.
• In Finland, Germany, Luxembourg, and the Netherlands, following requests for information on existing/potential US/Cayman funds, we suggest you use Direct Pre-Marketing for more regulatory protection and potential options (see next option).

2. Direct Pre-Marketing

 a) What Can You Do?

• Market existing/potential funds;
• Provide marketing documents and certain offering documents for each region; and
• Virtually or in person.

b) Where?

• Finland, Germany, Luxembourg, and the Netherlands.

 c) Items to Consider:

• No draft subscription documents.
• Marketing materials and offering documents (with necessary disclaimers) are permitted.
• Before providing any information on existing/potential US/Cayman funds, pre-marketing notification is required.
• If there is client interest, NPPR approval is required for any of the 4 countries.
• Following pre-marketing notification, there is an 18-month blackout period for accepting investments via reverse solicitation.

3. Hosted Pre-Marketing

a) What can you do?

• Market strategies and potential EU funds;
• Provide marketing documents including draft EU fund documents;
• Virtually or in person.

b) Where?

• In all 27 EU Countries.

 c) Items to Consider:

• Decks with strategy and draft fund information are permitted.
• No conversations on existing or potential US/Cayman funds.
• All marketing activity must be through Hosted Pre-Marketing Fund Service.
• Pre-marketing notification is required before providing information on a potential EU fund.
• Following pre-marketing notification, there is an 18-month blackout period for accepting investments via reverse solicitation.
• If this pre-marketing results in client interest in US/Cayman fund (i.e. reverse solicitation), NPPR approval may be required in each country. Note: some countries generally prohibit this activity such as Italy and Portugal.

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Scott G. Parkin is the Head of US for Zeidler Group.

Zeidler Group is a boutique asset management law firm and legal technology firm with newly opened US offices in New York City and Phoenix. Serving over 250 asset managers globally across 70+ jurisdictions, Zeidler Group specializes in cross-border distribution. As well as research-driven legal guidance, we offer various digital solutions for fund managers’ legal and compliance needs, including a Marketing Material Review Tool  (MMR-Tool) that uses Large Language Models for reviewing investment fund marketing materials against the laws of multiple countries as well as a customizable Vendor Due Diligence solution to efficiently manage questionnaire distribution, completion and rating as well as mitigate risk. Zeidler Group provides future-proofed solutions in navigating regulatory landscapes.