The European Commission has issued a paper seeking evidence with regard to private placing regimes within different EU States and as to whether there is a need for a European regime to facilitate cross-border placements.
The Commission's paper is apparently aimed at offers of what it refers to as "investment products" such as unregulated investment funds. This would include "permanent capital vehicles" which are closed-ended funds listed in London on the Official List or listed on Euronext Amsterdam and closed-ended funds traded in London on AIM which sell and market their securities to institutional investors in other EU States without utilising a passported prospectus. However, the term "private placement" in the UK has no specific legal meaning. It covers offerings by both regulated and unregulated firms across a wide spread of transactions, from auctions of private companies to the more conventional offerings of securities in hedge, private equity or property funds, to both institutional and other investors.
Among the questions to be determined with respect to any EU regime, therefore, would be what categories of offers (eg, new issues only or also sales of existing holdings), of what products ("investments" as compared to, for example, derivatives or sales of interests in trading companies) and to what categories of investor (institutional, expert, intermediaries, trade purchasers) would be caught? Further, should any EU regime apply only for the purpose of cross-border offers or should there be a harmonised regime applying to offers, whether cross-border or not? Or should it only apply to offers made by regulated firms, excluding therefore the large number of offers in the UK which are made by unregulated entities, including those overseas, making use of the exemptions in the Financial Promotion Order?
The risk with any new EU regulation is that it is broader than is necessary and creates excessive regulatory burdens, especially if it has to be shoe-horned into existing national regimes. It is important, therefore, that any new private placement regime does not extend further than specific areas of actual need, such as perhaps the marketing of investment funds to institutional investors on a pan-European basis, leaving other national private placement regimes in place. The concern is not so much the borderline between private placements and public offerings but the category of private placement which should be within any EU regime and what should remain unregulated except within national regimes.
It is to be hoped, therefore, that any new EU regime will have a beneficial impact by providing private placement access to the few remaining inaccessible jurisdictions, such as Italy, while not adding reporting or other regulatory requirements. The paper does not address the issue of registration requirements that apply to closed-ended funds when marketing to the public in various EU jurisdictions, such as Belgium and the Netherlands (which apply regardless of whether or not the closed-ended fund has passported a prospectus).
Other points raised by the Commission's paper include whether any regime should be limited to investments in which the issuer or manager is domiciled and authorised in an EU state (which would, however, exclude many unregulated funds), whether there should be minimum information requirements as part of the offering and/or whether regulators should be notified of the offer.
A particular concern relates to offers made through MiFID authorised firms. In addition to their general obligations with regard to fair clear and not misleading marketing communications, the paper suggests that firms may owe other duties to placees as (potential) clients under MiFID, depending on their client categorisation (retail, professional or eligible counterparty). It is important that any new regime should not muddy the distinction between who is a client and who is, for example, only a corporate finance or venture capital contact. A placing agent may have a client relationship with a placee, where for example it is providing investment advice or another investment service to the placee, but this will often not be the case. A placing firm may have no existing relationship with the person to whom the offer is made but instead rely on the exemptions in the Financial Promotion Order in determining to whom the offer is made. Its client will usually be the issuing entity or its fund manager, so the creation of a client relationship with placees would create conflicts of interest as well as undue burdens with regard to such matters as client classification and, in the case of retail clients, suitability.
Therefore, while there may be scope for an EU wide regime with regard to some types of investment products, it will be important to ensure any proposal will not unduly restrict firms' current flexibility to take some categories of offers either outside the regulatory regime altogether or to be subject only to a lightweight regime.