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Marketing restrictions for investment funds in EU and how to overcome those

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Investment ideas are rather scarce. Many small and medium size investors sit on lots of cash with little idea how to deploy it productively. It may be in bank deposits, in a number of banks so to benefit for deposit insurance scheme, if any of the bank go down. Bank deposits? Yes, earning nothing. Some of the cash is spilled occasionally, by investing in another vacation house (usually sold at the top of price range – usually a fact well known to the buyer, yet blissfully ignored).

New specialized funds with fresh investment strategies should be welcome in this environment, but needless to say that they are not. If someone has a strategy to offer to investors, he or she has to face a tough regulations. Even if you want to talk to the most advanced investors and asking for minimum investment starting at €125k.

In 2011 EU has issued Directive 2011/61/EU on Alternative Investment Fund Managers. The Directive, effectively, disallows marketing of any funds unless such fund has a fund management company licensed in EU. Funds with AUM under €100 million may opt out and be exempt of certain regulations as set out in the Directive. However, if it does so, such fund must be marketed under private placement rules which are left to national governments to be set.  Private placement rules in the biggest markets – France, Germany and UK — are prohibitively strict. In practice it means, if one registers a fund in Luxembourg or Malta, and chooses to opt out of the regulations set out in the Directive, such fund may be marketed under private placement rules in its country of registration. In other words, for a Luxembourg fund you invite potential investors, all of whom should be professional investors, to Luxembourg for marketing presentation. If you cross the nearby border into bordering France for an investor presentation, you break the law. In addition, the private placement rules are expected to be reviewed in 2018 and a new EU regulation may be on the way.

On the other hand, if one chooses to comply with the requirements as set forth in the Directive and as implemented in national laws of the member countries, such fund has EU “passporting rights”. By following a simple notification procedure, the fund can be marketed in all the EU. For example, if your fund has a licence in Luxembourg, you state to the regulator in Luxembourg that you want to market in Spain and Luxembourg regulator notifies the Spanish regulator and the fund is ready to be marketed to eligible investors in Spain.

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