Germany’s private placement rules for funds will change again.

On 19 July, the European Securities and Markets Authority (ESMA) published its advice on applying the Alternative Investment Fund Managers Directive (AIFMD) passport to non-EU Alternative Investment Fund Managers (AIFMs) and Alternative Investment Funds (AIFs) in 12 countries (including the United States). The European Commission (the Commission), the European Parliament, and the European Council will now consider the ESMA advice before the Commission may adopt its delegated act pursuant to Art 66(3) AIFMD in connection with Art. 67(6) AIFMD (the Delegated Act) in which it will decide whether or not the EU passport regime becomes available for certain non-EU AIFMs. The Delegated Act will have a significant effect on the ability of non-EU AIFMs to market AIFs in Germany.

The German Law Approach to the Delegated Act

German lawmakers have not used the option provided under AIFMD to allow a parallel application of the so-called “modified private placement rules” (which are currently mainly used by non-EU AIFMs to market AIFs in Germany and provide for a certain notification procedure with the Federal Financial Supervisory Authority [BaFin] before marketing can commence) and the EU passport regime. Rather, the Delegated Act will replace the modified private placement rules from the date it takes effect. This will apply irrespective of whether the Delegated Act will be positive for a certain jurisdiction (i.e., that the EU passport regime becomes available for AIFMs established in such jurisdictions, or negative so that the EU passport regime does not become available for such jurisdictions).

Because ESMA and the Commission have agreed on a “country-by-country approach”, the modified private placement rules under the German Capital Investment Code (Kapitalanlagegesetzbuch or KAGB) may in principle survive only for such jurisdictions that are not (yet) covered by the Delegated Act.

Consequences for Non-EU AIFMs

The ability of a non-EU AIFM to market AIFs in Germany will be affected by the Delegated Act differently depending on the jurisdiction where such AIFM is domiciled. Three different scenarios can be distinguished.

Passport Becomes Available

If the Delegated Act provides for a certain jurisdiction that the EU passport regime becomes available,^[1] an AIFM established in such jurisdiction must obtain the EU passport in accordance with Art. 37 – 41 AIFMD to continue marketing AIFs in Germany. The modified private placement rules will no longer be available for such AIFM.

Passport Does Not Become Available

If the Delegated Act decides that there are impeding obstacles for extending the EU passport regime to a certain jurisdiction, the legal consequences are unclear. Because the KAGB does not provide for a continuation of the modified private placement rules after the Delegated Act becomes effective, AIFMs established in such jurisdictions would likely have to obtain a full AIFMD license in a member state to be able to continue marketing AIFs in the European Union. However, it remains to be seen whether the BaFin may take a more liberal approach to these cases and continues to apply the KAGB’s modified private placement rules.

No Decision

If the Delegated Act does not cover a certain jurisdiction, AIFMs from such jurisdiction may continue to rely on the modified private placement rules under the KAGB.

Grandfathering Rules

Section 295 para 2 sentence 2 KAGB provides that BaFin marketing approvals that have been obtained for certain AIFs prior to the date when the Delegated Act takes effect will continue to apply. The last half sentence of Section 295 para 2 sentence 2 KAGB seems to limit this grandfathering rule to AIFs that are only marketed in Germany: “. . . if only marketing in Germany is intended”. Some German legal practitioners assert that this language is not intended to limit the grandfathering rules, and the BaFin is expected to issue further guidance on this issue.

Next Steps

Non-EU AIFMs should carefully monitor further developments with respect to the Delegated Act. AIFMD specifies a three-month period from the receipt of positive advice from ESMA for the Commission to enact the Delegated Act (which is subject, effectively, to agreement by the European Parliament and European Council). In its advice on 19 July, ESMA suggested that the Commission may wish to consider waiting until ESMA has delivered positive advice on a sufficient number of non-EU countries before triggering the legislative procedures necessary to enact the Delegated Act. Therefore, it seems unlikely that the Delegated Act will take effect in a short time frame, and non-EU AIFMs should still have enough time to prepare for the new legal regime.

_{[1] According to the ESMA’s advice, a positive decision can be expected for Canada, Guernsey, Japan, Jersey, and Switzerland. Additionally, ESMA has given positive advice, although qualified, in relation to Hong Kong, Singapore, Australia, and the United States. With respect to the United States, ESMA suggests three alternatives of restrictions:}

• _{Granting the passport only to those US funds dedicated to professional investors to be marketed in the EU by managers not involving any public offering}

• _{Granting the passport only to those US funds that are not mutual funds (under the US 1940 Investment Company Act)}

• _{Granting the passport only to those US funds the investors of which are professional investors}

_{This means that although US funds may generally by deemed to be passport eligible, only certain US funds may be marketed under the passport regime in the European Union. It is currently unclear if and how other funds, that do not meeting the above criteria, may then be marketed in Germany if the Delegated Act provides for such restrictions.}