AMF s answer in relation to the European Commission s call for evidence regarding private placement regimes in the EU 1. By way of introduction, the AMF would like to emphasize that the EC s consultation on private placement is timely considering that the current conditions under which investors have access to financial instruments are today far from being consistent. 2. The AMF strongly supports the proposal relating to the setting up of a European common private placement regime to the benefit of sophisticated investors (whether professional and/or qualified ones). The common private placement regime the establishment of which is contemplated in the EC s consultation would indeed be an appropriate way to meet the industry s request aimed at allowing the cross-border marketing of non UCITS products towards sophisticated investors: - The proposed setting up of a common private placement regime would in particular satisfy the request of the investment management industry. As a matter of fact, the definition and framework provided for by the Prospectus Directive (as defined hereunder) in relation to the transactions that do not qualify as public offerings, may to some extent be considered as a private placement regime with regard to the products subject to this Directive. - No such framework does exist as far as non UCITS funds are concerned. The private placement technique would therefore be a relevant measure for the purpose of remedying the current situation where non UCITS funds registered with the competent authorities of their countries of domicile, are in practice never authorized for distribution on a cross-border basis even though the targeted investors are sophisticated. Hence, non UCITS funds (including both European non UCITS funds and investment funds domiciled outside the EU) may only be bought as opposed to marketed or distributed. 3. The private placement technique would further be a means to prevent some practices developed by some professionals for the purposes of circumventing the European regulation in force. Experience has shown that some investments into non UCITS funds were effected by investors who were: - either required to certify in writing that the subscription was made upon their own initiative; - or offered the funds under some sort of wrappers having an uncertain legal status and in anyway not subject to the Prospectus Directive nor to the regulation on investment funds. In this case, the funds are used as the underlying instruments of the wrappers and the investors, who choose to invest in such instruments, fully incur the related risks. These practices show that the current regulation is no more adapted to the investment fund market and in particular, to the current diversity of the funds offer. They also entail situations where investors have no protection especially given that the aforementioned wrappers do not ensure that an adequate and timely information be provided to them for them to make an informed investment decision. In fact, most of these wrappers are not subject to the investors protection rules provided for by the MIFID Directive (as defined hereunder) pertaining notably to the information and advice to be delivered to the investors including professional ones. The question of the dissemination of non UCITS funds and more generally of financial instruments, to retail investors through such wrappers (such as structured notes or unit link life insurance contracts) should therefore be considered in the course of the European discussion on the common private placement regime to be. It is the AMF s opinion that any financial instrument should be subject to the same rules as far as its sale is concerned, whether it is sold directly or within a specific legal wrapper. The establishment of a common private placement regime would be a most appropriate way to allow the cross-border marketing of non UCITS funds and therefore to meet the fund industry s request and the sophisticated investors expectations, provided nonetheless that it: - is aimed at sophisticated investors only (including professional investors, wealthy and/or well-informed investors); and - includes investors relevant protection rules (in particular, as regards the adequate information to be delivered to the targeted investors).
Questions 1a: Is private placement a useful concept in national laws? What is the size and structure of the business that developed under the national regimes (geographical and product breakdown, dominant players etc.)? In the AMF s opinion, the private placement has indeed proved to be a useful concept and tool for selling financial instruments in France. 1. From a general perspective, it is worthy of note that even though French law does not provide for a precise definition of the private placement as such (French law actually defines public and non public offerings), private placement practices do regularly take place in France. As a matter of fact, the private placement mechanism has been increasingly used in practice and has, to a large extent, met the requirements of both the issuers and the socalled qualified investors (e.g., professional clients or sophisticated investors). The incorporation into French law of a definition of the private placement would have the advantage of providing the industry with a legal written basis and therefore with a legal certainty. 2. More specifically, it is worthy of note that: (i) the private placement technique has been used in France since 1998; (ii) such private placement practice nevertheless does not relate to investment funds. (i) the private placement practice developed in France in 1998 upon the enactment of a French law pertaining in particular to public offerings. Hence, it can be said that the private placement concept was introduced into the French industry s practice in 1998, that-is-to-say, five years before the issue of the Directive 2003/71/EC of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC (hereafter referred to as the Prospectus Directive ). This early incorporation into the French practice of the private placement technique shows that there was already a need for such a mechanism at the time. Actually, the private placement concept could be said to have been originally introduced into the French practice with the law n 98-546 of 2 July 1998 which was completed by a decree n 98-880 of 1 October 1998 and by five regulations enacted by the AMF (regulations n 98-01, 98-07, 98-08, 98-09 and 98-10). Apart from providing for a new definition of a public offering (which was initially limited to issues by commercial companies), these texts provided, for the first time, for criteria pursuant to which an offer would not be considered as public and would not be subject to the rules regarding public offerings: such an offer could therefore be considered as a private placement. It is interesting to note that these texts did not provide for a straightforward definition of the private placement technique as such. Instead, they provided for the different circumstances under which an offering might in no event qualify as a public offering (and therefore might be considered as a private placement). It is interesting to note that the definition of public and non public offerings as provided in 1998 by the aforementioned French law and decree was quite close to the one found in the Prospectus Directive and therefore in the French provisions implementing the said Directive (and in particular, Article L. 411-2 of the French Monetary and Financial Code 1 ). Hence, the private placement mechanism is a well known and a useful concept in France as in practice, it has been used for some time now. (ii) the private placement practice in France does not relate to investment funds despite the interest of the fund industry and of sophisticated investors in this regard. In the AMF s opinion, the application of private placement techniques to non UCITS funds would therefore be a question to be considered at the European level (please see AMF s answer to question 3 hereunder). As a brief conclusion of the above and as far as the French market is concerned, the AMF would therefore propose that the discussions on the potential establishment of an EU harmonized private placement regime include investment funds. 1 A translation into English of Article L. 411-2 of the French Monetary and Financial Code is provided in the appendix hereto. 2
Questions 1b: Does the absence of a common understanding of private placement result in a single market failure? Do differences between national regimes, i.e. the absence of an EU private placement approach prevent or discourage possible cross-border investment transactions? Are any sections particularly affected? How do problems manifest themselves? From a general standpoint, the AMF considers that the absence of a common understanding of private placement may entail a slight failure of the single market as it may, in some cases, raise some legal uncertainty and impede distribution of financial instruments under a cross-border private placement (please see AMF s answer to question 10 a) hereunder). Nevertheless, it is interesting to note that despite the absence of a common understanding of private placement, non public offerings (which may to some extent be considered as private placement transactions), do regularly take place in France whether the issuer is French or foreign. As a matter of fact, the vast majority of issues or distributions of financial instruments that are effected in France are not public offerings as defined by French law implementing the Prospectus Directive. Hence, the absence of a harmonized definition at the European level cannot be considered as a serious obstacle to the carrying out of such transactions. Furthermore, the absence of an EU private placement approach does not, to the best of the AMF s knowledge, necessarily impede the execution of cross-border transactions. In the light of the industry s practice, it appears that issuers do adapt to the national private placement regime applicable in the Member State in which they intend to offer financial instruments on a non public basis. As far as non UCITS funds are concerned (i.e., investment funds which do not comply with the UCITS Directive n 85/611 of 20 December 1985 as amended (hereafter referred to as the UCITS Directive ), and which therefore do not benefit from the European passport), the AMF would like to point out that the absence of a common understanding of private placement might be considered as being a sort of single market failure. As a matter of fact and despite the interest showed by the industry and by sophisticated investors, the impossibility of offering such funds under a private placement, whether on a national basis or on a cross-border basis, impedes their distribution to the aforementioned sophisticated investors (as opposed to the public). Questions 2: How can the borderline between private placement and public offering best be defined (1)? What should be the legal consequences of leakage of private deals into the public sphere (including any liability for the original issuer/placement agent) (2)? 1. In the AMF s opinion, the borderline between private placement and public offering shall be defined by reference to the specific legal criteria describing the circumstances under which an offering may not qualify as a public offering, as such criteria are determined by the national legal provisions implementing the Prospectus Directive. Having said that, the AMF would nevertheless like to emphasize that an offering that does not satisfy the conditions defining a public offering, shall not necessarily and automatically be considered as a private placement. For instance, this would be the case with regard to financial instruments which are unconditionally and irrevocably guaranteed by a European Economic Area Member State. In such a case, the issue is neither a public offering nor a private placement. As a result, the borderline between private placement and public offering could rely on the following characteristics: (i) the nature of the investors (i.e., whether he is a qualified investor (by virtue of its legal status and/or financial capacity), or is part of a restricted circle of investors representing less than 100 investors); (ii) the size of the offer and the nature of the issuer (for instance, if the total amount of the contemplated transaction is less than 100,000 euros); (iii) the denomination of the securities offered (for instance, if the denomination per unit of the securities offered amounts to at least 50,000 euros). 3
It is interesting to note that the circumstances under which an offer falls outside a public offering pursuant to the Prospectus Directive and could therefore be considered as a private placement, are wider than those previously determined under French law. As a matter of fact, pursuant to the French law which was applicable before the enactment of the Prospectus Directive, the characteristics upon which the borderline was based had a rather limited scope as they related to: - the nature of the investors (the offer was not considered as being public if the investors to which it was addressed were (a) either qualified investors, (b) or a group of less than 100 investors who were related to the managing directors of the relevant issuer whether these relationships were business or family ones, and were acting for their own account); - the nature of the market on which the offer was effected (an admission of a financial instrument to trading qualified as a public offering if it was made on a regulated market). 2. As regards the legal consequences of a leakage of the private deals into the public sphere, they are, in the AMF s opinion, detrimental both to the issuers and most importantly, to the investors. As regards the investors, if a financial instrument originally purchased under a private placement is sold again by the first/initial buyer in a circumstance which does not meet the legal conditions imposed upon private placements (i.e., in a circumstance which is equivalent to a public offering), the new owner (i.e., the second buyer) of the said instrument will not benefit from the legal rights to which he is entitled, under the Prospectus Directive and the implementing national law, in the case of a public offering. In particular, this new owner will not receive the relevant information required by the Prospectus Directive (such as the prospectus) notably for the purpose of enabling the investor to make an informed investment decision (i.e., an informed assessment of the assets and liabilities, financial position, profit and losses, and prospects of the issuer and of any guarantor, and of the rights attaching to such securities ). In such a case, the investor will acquire a financial instrument in a public offering circumstance without the benefits attached to the public offering regime. His interests would therefore be jeopardized. As regards the issuers, a leakage implies that the issuer who has initially intended to privately place some financial instruments, unintentionally falls within the scope of a public offering and becomes subject to the related obligations upon issuers (such as the obligation to produce and publish a prospectus and audited financial accounts). Issuers may therefore not always be aware that a leakage has taken place and that they are consequently subject to the legal obligations pertaining to public offerings. Hence, the leakage of private deals into the public sphere is a major issue given that the risks attached to such a practice are far too important for the investors and are difficult for any regulator to monitor due to the lack of efficient tools for this purpose. The means to prevent or remedy the consequences of such a leakage should therefore be a question to be considered and discussed at the European level. The AMF would like to point out that the leakage of private deals into the public sphere constitutes an issue irrespective of the nature of the investor (i.e., whether it is a qualified investor (as such term is defined in the Prospectus Directive), or an investor within a restricted circle, or a layman investor). The non-delivery of a prospectus in the course of a public offering does not simply meet the purpose of the Prospectus Directive which is to protect investors interests and provide them with the necessary assistance in the course of their investments. A leakage is therefore a serious breach of the fundamental principles set out in the Prospectus Directive. For the purposes of preventing and fighting against the aforesaid leakage, the AMF notes that the Prospectus Directive already provides for measures aimed at preventing the dissemination of financial instruments into the public. Article 3, paragraph 2 of this Directive actually provides that any subsequent resale of securities which were previously the subject of a non public offering (e.g., an offer solely addressed to qualified investors, or to a group of less than 100 investors, or an offer with a total consideration of less than 100,000 euros, etc.), shall be considered as a separate offer and it shall be decided whether that resale is a public or non public offering for the purposes of determining the rules to apply (such as the obligation to publish a prospectus) 2. 2 Article 3, paragraph 2 of the Prospectus Directive: However, any subsequent resale of securities which were previously the subject of one or more of the types of offer mentioned in this paragraph shall be regarded as a separate offer and the definition set out in Article 2(1)(d) shall apply for the purpose of deciding whether that resale is an offer of securities to the public. 4
Nevertheless, the attention of the AMF has been drawn on several occasions to the fact that such measures were difficult to apply in practice, notably in the case of listed financial instruments, given that the original issuer or placement agent does not usually have the tools nor is he in a position to master the resale timing and circuits. In any case, the AMF strongly believes that the best way to prevent and fight against leakages of private deals into the public sphere is to set up the common private placement regime to be, in a very clear, precise and straightforward manner. In particular, it could be contemplated to require under the said common regime, that privately placed financial instrument (e.g., non UCITS fund) be expressly labelled as being intended for sophisticated investors only. Such a label could, for instance, be specified in the adequate information to be delivered to investors. 3. In addition, the AMF would particularly like to draw the EC s attention to the specific issue relating to the practice of some institutional investors consisting in offering financial instruments to retail investors within particular legal wrappers. Pursuant to such a practice, the institutional investors legally acquire financial instruments (for instance, an investment fund), whether under a private placement or not, and offer them to retail investors as the underlying instruments of a specific legal wrapper (which could be, for example, an investment vehicle or scheme). Under such a practice, the individual investment decision is made and the related risk is borne by the retail investors only (this practice is referred to by the industry as being the instiretailization (i.e., instividualisation in French)). The AMF is actually concerned by such a practice considering that in most cases, the investors protection rules are excluded. For instance, some potential legal wrappers offering investment funds as underlying instruments (e.g., life insurance products, PERCO, PERP ) are not subject to the provisions of the MIFID Directive and in particular, those pertaining to the rules of good conduct and the provision of advice and information to investors. It is noteworthy that the MIFID Directive does ensure in some cases that rules of good conduct apply as far as the provision of advice and information on the part of the distributor is concerned. It should also be pointed out that in respect of UCITS funds, the provision of more detailed information (such as the simplified prospectus or the current project pertaining to the key investor information ) is required. In the AMF s opinion, any financial instrument should be subject to the same rules as far as its sale is concerned, whether it is sold directly or within a wrapper (e.g., a structured note, a unit link life insurance contract). Given that the issues potentially raised by the use of the aforesaid wrappers, the AMF would therefore suggest that the common private placement regime to be: - ensure that where professional clients acquire financial instruments (e.g., non UCITS funds) under a private placement, they do not transfer the instruments risks onto the retail investors. - ensure some consistency with regard to the information and advice obligations owed to retail investors, whatever the nature of the wrapper. In this regard, it could be contemplated to extend the rules set out by the MIFID Directive to some of these legal wrappers in particular, where retail investors make individual investment decisions. The placement of securities through financial intermediaries shall be subject to publication of a prospectus if none of the conditions (a) to (e) are met for the final placement. 5
- take into account the particular legal status of certain wrappers proposed by institutional investors which in some cases, is uncertain as far as marketing and distribution is concerned. In the AMF s opinion, the definition of the legal status of these legal wrappers and of the regime to apply to them, in particular in relation to the dissemination of the underlying instruments to the retail investors, should be considered with care at the European level notably given their cross-border nature. Some wrappers actually are not subject to the MIFID Directive, or might further be provided pursuant to a specific contract which might not qualify as a resale within the meaning of Article 3, paragraph 2 the Prospectus Directive (as mentioned hereabove). They therefore leave the individual investment decision and the related risk to the retail investors. This would for example be the case for unit link life insurance contracts pursuant to which the insurance company is the legal owner of the financial instruments offered as the underlyings of the contracts, whereas the subscribers only own the unit links. It is noteworthy that in such a case, the value of the units will closely depend on the evolution of the underlying instruments. - consider the consistency of such wrappers with the UCITS passport for the purpose of ensuring that the private placement does not allow, through the use of the aforesaid wrappers, large possibilities of non UCITS cross-border marketing towards retail investors (as is today the case for UCITS funds complying with the information obligations and the specific risk spreading rules required under the UCITS Directive). Questions 3: Are there some types of investment products which could benefit in particular from private placement; e.g. closed ended funds or non-harmonised open ended funds? Does it make sense to develop a private placement regime exclusively for some designated products? Or should we build a framework that is open to any types of security? Please give reasons. In this regard, it is proposed to provide a general overview (1), then to consider the application of private placement to non UCITS funds (2), the scope of the European private placement regime to be (3), the possibility to privately place non European investment funds (4), and the exclusion of funds of hedge funds from the European private placement regime (5). 1. From a general standpoint, the AMF believes that there is no reason for excluding from the private placement regime investment products (e.g., undertakings, securities and shares) which may not today be offered under a private placement. In the AMF s view, the definition of the private placement scope is essential. The better it is determined, the easier it will be to prevent and avoid leakage of private deals into the public sphere. Having said that, the AMF believes that the setting up of a common private placement regime at the European level nonetheless implies that some adjustments be made depending on the specifications of the financial instruments concerned. Moreover, in the AMF s view, the various categories of financial instruments do not necessarily have an interest in being offered under a private placement. Indeed, the interest might be limited with regard to some instruments. 2. As far as non UCITS funds are concerned (e.g., non harmonized funds, closed ended funds, etc.), the AMF strongly supports the proposal consisting in allowing the offer of such products under a private placement. There are several grounds justifying this approach. In particular, this would: (a) unify the rules which are applicable to the different legal wrappers; (b) end the legal uncertainty and risks concerning certain transactions between non UCITS funds professional buyers and sellers; meet the fund industry s request: fund managers and distributors indeed consider this would enable them to offer their non UCITS funds to new categories of investors (being sophisticated ones), which they could not reach otherwise; 6
(d) facilitate sales on a domestic and cross-border basis and therefore enhance market competition: it would widen investment managers scope of distribution of their different ranges of funds: in particular, - investment managers in France should be in a better position to sell their domestic funds across the borders (e.g., in other Member States) and their foreign funds in their country of domicile (e.g., to national clients); - foreign investment managers (domiciled for instance in Member State A) should be able to more easily offer their products to the sophisticated and professional investors of a given Member State (Member State B); (e) enable investors, provided they comply with the subscription conditions, to have a wider choice of investments and to be in a better position to select the more relevant vehicle as regards their investment objectives, risk profiles and expected returns; (f) not entail that the relevant investors enjoy less or no protection: as a matter of fact, the offer of financial instruments under a private placement does not exclude in any way the application of investors protection rules whether they are found in existing European Directives or in new European texts to be. In particular, the provisions of the MIFID Directive pertaining to the information to be delivered to clients and to the appropriateness and suitability tests to be carried out by the investment firms (as such terms are defined by the Directive) shall be fully applicable to investors who are offered financial instruments under a private placement. It is noteworthy that the above proposal to allow the distribution of non UCITS funds under a harmonized private placement regime is in line with AMF s position on the fund distribution possibilities allowed under the MIFID Directive which are not to challenge in any way the UCITS passport provided for by the UCITS Directive. The AMF is nonetheless aware that the establishment of a common private placement regime for non UCITS funds will be quite revolutionary (as it will put an end to the application of purely national private placement regimes) and will also raise issues notably as regards: - the potential collateral damage for retail investors (which should be dealt with as mentioned hereunder); - the scope of the common private placement regime (whether one and the same regime for traditional securities and investment funds, or a specific regime for investment funds); - the possibility to privately place non European funds. Hence, for the purpose of the common private placement regime to be, it is essential that: - a clear and straightforward definition of the eligible investors be set up in order to avoid private placement offers to retail investors; - appropriate measures be taken in order to prevent the dissemination of funds initially sold under a private placement to retail investors; - the particular case of the legal wrappers whereby institutional investors offer financial instruments they have acquired to retail investors (for instance, in the case of unit link life insurance contracts) be taken into account. 3. With regard to the scope of the common private placement regime to be: As mentioned hereabove, it could be considered that a minimum common regime (at an embryonic stage) does exist on the basis of the provisions of the MIFID Directive on the information to investors. Having said that, the AMF would nonetheless strongly suggest that a specific private placement regime for investment funds be set up (as opposed to one and the same harmonized private placement regime for both traditional securities and investment funds) given that collective investment schemes are a very particular category of investments which are subject to specific conditions notably as regards: 7
- investors information (funds investors are supposed to have on average a limited financial knowledge compared to investors in traditional securities: therefore, they need a minimum adequate information in order to make an informed investment decision); - the regulated status of the funds service providers (in particular, funds investment managers have to be authorized in their country of domicile for the purposes of providing portfolio management services). In respect of investors information, it is worthy of note that the UCITS Directive requires the production of a full prospectus and a simplified prospectus whereas French law requires that French non UCITS funds which are authorized by the AMF, produce a prospectus (even if they are dedicated to certain investors only). Moreover, the MIFID Directive does provide for information and disclosure obligations which ensure that investors receive a minimum information. Article 19, paragraph 3 of the Directive actually provides that: Appropriate information shall be provided in a comprehensible form to clients or potential clients about: [ ] - financial instruments and proposed investment strategies; this should include appropriate guidance on and warnings of the risks associated with investments in those instruments or in respect of particular investment strategies, [ ] - costs and associated charges, so that they are reasonably able to understand the nature and risks of the investment service and of the specific type of financial instrument that is being offered and, consequently, to take investment decisions on an informed basis. This information may be provided in a standardised format. Nevertheless, the obligations imposed by the MIFID Directive relate to the distribution of financial instruments by investment service providers. Moreover, they do not ensure the provision of a document in a permanent format. Hence, for the purpose of providing for an adequate substance and format to the information to be delivered under the common private placement regime to be, it is suggested that a study be carried out in order to compare the information requirements under the different private placement regimes existing outside the EU (notably in the United States). The AMF believes that the definition of adequate information flows to the benefit of investors (even if they are qualified) under the common private placement regime to be, should necessarily rely on the international standards currently in force. In respect of the regulated status of the funds service providers, it is suggested that the common private placement regime to be, include in particular a requirement according to which the investment managers of privately placed funds be regulated. However, it could potentially be considered to submit funds investment managers to less stringent rules than the ones which are applicable to UCITS investment managers. Finally, it is worth pointing out that the rationale for implementing the private placement mechanism to traditional securities, is quite different from the one regarding investment funds. In the first case, the objective of issuers or their intermediaries is to be exempted from the obligation to draft and publish a prospectus (as is required under the Prospectus Directive). In the second case, the rationale is simply to widen the scope of the non UCITS funds distribution and therefore meet the industry s request and the sophisticated investors expectations. The purpose of the funds private placement is therefore not to avoid the establishment of the required information. Given that the private placement of securities and that of funds aim at serving different purposes, it is therefore not certain that one and the same harmonized private placement regime would be suitable in both cases. As a conclusion, the establishment of two harmonized private placement regimes applicable respectively to traditional securities and to investment funds should, in the AMF s opinion, be considered provided: - this is in compliance with international standards; and - the private placement regime for investment funds is aimed at sophisticated investors only. 4. With regard to the non UCITS funds that could be privately placed, the AMF believes that the common regime to be at the European level should encompass non UCITS funds domiciled both in European countries and in off-shore countries (e.g., Bermuda) given the related potential advantages for investors. From a general standpoint, it is worth stressing that only regulated entities should be authorized to offer financial instruments under a private placement. 8
Nonetheless, the AMF suggests that the private placement of non European funds be subject to particular conditions for the purpose of: - protecting the interests of European investors who are legitimately not familiar with non European laws; - ensuring a fair and equal competition between the funds service providers. It is interesting to note that the private placement possibilities offered by the Prospectus Directive are limited to transactions initiated in a Member State. The AMF would therefore suggest at this stage that the non UCITS funds private placement regime be set up as follows: - in the case of European funds, their private placement would be subject to the European common private placement regime (to be); - in the case of non European funds, the subscription of their units or shares under a private placement would be authorized provided that such subscription be made pursuant to the conditions of the European common private placement regime (to be), and provided that it complies with specific conditions of equivalence, reciprocity and cooperation to be considered at the European level. These specific conditions would need to be defined by the EC and where applicable, the CESR. Such conditions could consist of a general equivalence, reciprocity and cooperation agreement to be entered into with the competent authority of the State of domicile of the non European fund. The purpose of such agreement would be to authorize a reciprocal sale of investment funds on the territories respectively of the non European State, and of the EU Member States, subject to specific and similar conditions (in particular as regards the conditions of authorization and control of the investment managers, the nature of the targeted investors, the information to be delivered to such investors, the cooperation and supervision conditions, the nature of the funds concerned), and subject to commercial reciprocity. In any event, the AMF believes that such equivalence, reciprocity and cooperation mechanism should be discussed and defined at the European level. As a matter of fact, if each Member State was to individually negotiate with the non European State the conditions for operating such a mechanism, this would most likely result in a situation where the conditions would be different and even contradictory from one Member State to the other. This would be highly risky given that the authorization granted by one Member State to a non European product would allow it to have access to the markets of all the other Member States. In the event an equivalence, reciprocity and cooperation agreement is entered into pursuant to the above proposal, this would imply that: - a non European fund intending to offer its units or shares in a given Member State and complying with all the conditions required under the European (common) private placement regime (notably as regards the targeted investors and the authorization of the investment manager), would be authorized to be privately placed in the Member State; - a European fund intending to offer its units or shares in a non European State in conditions being similar to the ones required under the European (common) private placement regime, would be authorized to do so. In addition to such equivalence, reciprocity and cooperation mechanism, it could be contemplated to provide for a notification procedure whereby the relevant investment fund would notify before privately placing its units or shares, the competent authority of the State where the placement is to be made. In the AMF s view, this equivalent, reciprocity and cooperation mechanism would therefore enable investors who comply with the subscription conditions provided under the common private placement regime to be, to have access to funds worldwide (and in particular, non European products) while remaining within a familiar and secure framework (i.e., the European common private placement regime to be). This nonetheless implies that the competent authority of the non European State agrees with the conditions that will be defined under the common private placement regime to be. 9
5. Finally, the AMF would nonetheless like to point out that the non UCITS funds referred to hereabove (i.e., the non harmonized funds which are contemplated to be offered under a private placement), shall be distinguished from the fund of hedge funds. As previously indicated on several occasions, the AMF is convinced that certain investment funds such as funds of hedge funds (as opposed to single hedge funds ) should, by virtue of their specifications, be distributed throughout the EU pursuant to a specific harmonized fund regime. There would be no interest whatsoever to distribute such funds under a private placement regime. Due to their characteristics and for the investors to receive all the benefits attached to such investment products, a common and harmonized status (based on the UCITS model) should be established at the European level for the purposes of providing for a common definition of this investment vehicle and for allowing a straightforward distribution (whether on a national or a cross-border basis) pursuant to relevant conditions (regarding in particular, the investors and the information to be delivered to them). As a matter of fact, the fund of hedge funds is an investment vehicle allowing retail investors (subject to certain conditions to be set up) to have access to hedge fund techniques. Considering the growing interest of retail investors regarding such products, the best way to meet their request and at the same time to make sure their interests are taken care of, is to establish at the European level a harmonized fund of hedge funds which would therefore benefit from the European passport (just like the UCITS). Hence, funds of hedge funds as well as any other non UCITS funds which might be suitable for retail investors, would be an exception to the application of the private placement to non harmonized funds. Apart from this exception, the AMF considers that non harmonized funds (e.g., closed ended funds, non-harmonised open ended funds) could benefit from private placement. Questions 4: What investors should be eligible counterparties under private placement (i.e. capable of being approached on a private basis with a view to possible investment)? Should eligibility be defined following the definition of "eligible counterparty" or of "professional clients" in MIFID, or following the definition of a "qualified investor" of the Prospectus Directive? Or would you suggest an alternative definition? 1. The definition of the investors who could be offered financial instruments under a private placement is essential for the purpose of establishing an efficient common private placement regime. The definition to be set up should therefore be carefully considered and should further be straightforward and precise. The AMF considers that a good way to build the definition of the investors who would be eligible counterparties under a private placement, would be to rely on the definitions already provided for in the existing European Directives in relation to sophisticated investors (as opposed to laymen investors). Indeed, the definitions of qualified investors pursuant to Article 2 of the Prospectus Directive and the definition of professional clients under Article 4 of the MIFID Directive would, as suggested by the EC, be a good and relevant basis for this purpose. It is also noteworthy that the different definitions in force at the European level are quite similar. 2. More particularly, the AMF would suggest to build the definition of the eligible investors on the basis of the following principles: (i) given that the private placement mechanism enables investors to have a wider access to financial products, the said definition shall specify that for an investor (whether a natural or a legal person) to be eligible under a private placement, he shall possess the necessary skills/expertise in the financial field and means for the purposes of understanding and properly assessing the risks attached to financial instruments transactions and of making an informed investment decision on the sole basis of the legal information provided to him and without the assistance of a financial adviser; 10
(ii) the definition shall also provide for a list of investors who shall be eligible by virtue of: - their legal status provided they act for they own account (for instance, a credit institution, a national public body, a supranational institution) or provided they act on behalf of a collective investment scheme (for instance, investment firms or banks acting on behalf of a mutual fund) or; - by virtue of their financial capacity (if it is greater than thresholds to be determined as regards for instance their total balance sheet, annual turnover, the size of their portfolio, etc.) so that the definition of eligible investors is not limited to professional investors only and includes non professional investors who may have sufficient financial knowledge to understand the risks attached to a given private placement transaction. 3. As a result thereof, the AMF would suggest to rely on the professional client definition found in the MIFID Directive on the ground that: - the Directive has been built in such a way so as to encompass globally the various distribution channels of all financial instruments. In fact, one of its main contributions is to deal with the various questions pertaining to the distribution to clients of investment services and investment products, whereas for instance, the Prospectus Directive only deals with limited cases (e.g., the prospectus exemptions) and with a limited number of financial instruments. - such a definition includes professional investors as well as wealthy and/or well-informed investors. The use of such a definition would allow a wider scope for the sale of investment funds under a private placement. This definition would therefore be sufficiently large to adequately represent the targeted market. In the AMF s view, it would therefore be more relevant for the purposes of the common private placement regime, to determine eligible investors under a private placement in consideration of the terms of this Directive. Questions 5: How should the supply side of a private placement be regulated? Is there a need for additional rules or would the respective prudential requirements for the specific market player suffice? Should financial institutions from some/all third countries be recognised? There are two main risks that can be identified at this stage as far as the supply side of a private placement is concerned. - The first risk is that the financial instrument which is privately placed falls into the hands of investors who do not have the necessary skills and experience to assess the risks attached to it and therefore, to make an informed investment decision (i.e., the leakage of private deals into the public sphere). In this regard, it could be contemplated to impose upon the issuer or intermediary specific information obligation to the benefit of the investors. For instance, such information could be made on the model provided for under French law. One could cite for instance Article 211-4 of AMF s General Regulation which provides that the issuer or the intermediary carrying out the non public offering has to inform investors participating in the transaction that (i) the transaction does not require a prospectus to be submitted for approval to the AMF, and that (ii) the dissemination, whether direct or indirect, of the relevant financial instruments to the public, may only be effected in accordance with the provisions of Articles L. 411-1 (which provides for the definition of public offerings ), L. 411-2 (which defines the terms qualified investors and a restricted circle of investors ), L. 412-1 (relating to the information to be published in case of a public offering) and Articles L. 621-8 to L. 621-8-3 (which provide for the information to be produced to the investors) 3. 3 A translation into English of the aforementioned Articles L. 411-1, L. 411-2 and 211-4 is provided in the appendix hereto. 11
Hence, pursuant to this rule, investors participating in a non public offer must at all times know that the offering is not public and therefore, does not meet the various obligations (in particular as regards the information to be disseminated to the investors) required in the event of a public offering. Furthermore and as mentioned hereabove, it could also be contemplated to require that privately placed financial instrument (e.g., non UCITS fund) be expressly labelled, in the information delivered to investors, as being intended for sophisticated investors only. - The second risk that can be identified at this stage is the situation where the supplier of a private placement is not regulated in its country of domicile so that any undertaking on its part might be difficult to enforce. The AMF would therefore suggest that the harmonized private placement regime require that any supplier be a regulated entity (i.e., having a legal status and having rights and duties under the law of its country of domicile). Apart from the two risks mentioned in the preceding paragraphs, it is not certain that the setting up of additional rules at the European level for regulating the supply side of a private placement would be necessary. Question 6: Despite being limited to a (to be defined) set of sophisticated investors, would there still be a need for investor protection rules? Is there a need to include rules regarding the eligibility of certain players the owners/unit holders/participants of which might be more vulnerable (e.g. pension funds)? The establishment of investors protection rules is not, in the AMF s opinion, necessary on the ground that an investor under a private placement shall already benefit from the rules found in the existing Directives and in particular, the provisions of the MIFID Directive regarding the investors information and the related obligations on the funds distributors (please see AMF s answers to questions 7 and 10 b) hereunder). Moreover and as already specified hereabove, an investor participating in a private placement is supposed to be a sophisticated one (please see in particular AMF s answer in relation to question 2 hereabove). Questions 7: Which kind of restrictions/requirements would need to be deactivated for a private placement regime to deliver significant benefits? Which would be seen as excessive? How much discretion can be left to local authorities in defining these rules without risking a minimum level of harmonisation? For a harmonized private placement regime to deliver significant benefits, it shall consist of: (i) (ii) one the one hand, a general part providing for the general principles such as the definition of the eligible investors (as referred to in question 4 hereabove); one the second hand, the particulars, i.e., the specific rules to be confirmed or as the case may be, to be determined for the purpose of dealing with the distinctive features of the different financial instruments (such as the non harmonized collective investment schemes). With regard to the private placement of the securities falling within the scope of the Prospectus Directive, no restriction/requirement would, in the AMF s view, need to be deactivated for the purpose of a fully effective private placement regime. As a matter of fact, the Prospectus Directive already provides for the deactivation of important restrictions and requirements in the event of a non public offering of securities. In particular, the offeror is released from the obligation to produce a prospectus. 12
With regard to the private placement of non harmonized funds (as referred to in AMF s answer to question 3 hereabove), given the particular nature of such instruments and of their investors (who are generally considered to have a limited knowledge in the financial field in comparison with the investors of traditional securities), it is proposed not to provide for the deactivation of the existing restrictions. On the contrary, it is proposed to impose or as the case may be, to keep the following requirements: - the provision of an appropriate information in a comprehensible form to the investors pursuant to the high level principles set out by the MIFID Directive: the Directive requires in particular that the information relate, among others, to the financial instruments including appropriate guidance on and warnings of the risks associated with investments in those instruments. The purpose of the information obligations provided for by the Directive is to enable investors (whether existing or potential clients) to take an informed investment decision; - the notification of the competent authorities of the Member State in which the non harmonized fund is due to be privately placed (i.e., the host Member State): pursuant to the UCITS Directive, a UCITS which intends to market its shares or units in a given Member State has to notify beforehand the competent authorities of that Member State. In the same manner, the AMF considers that the private placement of a collective investment scheme to the benefit of an investor located in the same or in another Member State, could likewise be notified to the competent authorities of the relevant Member State. The purpose of such a proposal would not be to increase the administrative burden to be dealt with by the funds service providers and the Member States competent authorities. The notification of the relevant Member State s competent authorities could be an efficient and easy way to prevent leakage and to ensure that any investor of a non harmonized fund is able to understand and assess the risks attached to the investment into the fund, and to freely make his own investment decision in an informed manner. The notification process and cooperation between the Member States competent authorities (in the case of a fund s cross-border private placement) could in fact meet that purpose. Finally, it should be noted that the prior notification would not entail that the competent authorities proceed to a prior review and control of the adequate information delivered to the investor on the private placement transaction. Unlike for UCITS the subscribers of which are generally investors with an average knowledge of the financial field, the investors of funds under a private placement would be expected to be sophisticated and as such possess the relevant skills and experience. Hence, the possibility for the competent authorities to review on an ex-post basis the information delivered to them would therefore not be an issue in particular, if such information is to be subject to the relevant provisions of the MIFID Directive. Question 8: What would you consider best practice at national level among the existing private placement regimes: with respect to purely domestic private placements and with respect to private placements across borders? As indicated hereabove, there is no legal private placement regime in France. The private placement regime which has gradually been developed in France derives from the practice of the industry. French law only provides for the rules which are applicable to public and non public offerings. Nevertheless, it is worthy of note that French law requires in relation to non public offering, that the investor be duly informed that the transaction is being effected outside a public offering. Such a rule would constitute a best practice if applied to private placement. It could therefore be suggested that a key rule of the harmonized private placement regime be that investors buying a financial instrument be duly informed of the private placement nature of the transaction and of the related consequences (in particular, as regards the information delivered and the restrictions on resale). Such a rule would ensure some protection of the investors interests and at the same time, help prevent potential leakage. 13