alternative investment management association (aima)

AIMA Special Report: Marketing Hedge Funds (France, Germany, Switzerland, UK) © Simmons & Simmons, 1999 1

ALTERNATIVE INVESTMENTMANAGEMENT ASSOCIATION (AIMA)

SPECIAL REPORT: Marketing Hedge Funds

By Iain Cullen1

Please note that the information herein is correct as at 1st October 1999 and should not be relied upon tobe accurate after this date. This report is not intended to be a definitive or exhaustive analysis of theissues involved nor to render legal advice. It seeks only to give the reader an overall view of the subjectmatter and it is essential that persons wishing to rely on any matter referred to in this report should firstseek specific advice.

IINNTTRROODDUUCCTTIIOONN

This Special Report examines the laws and regulations governing the marketing of offshorehedge funds in France, Germany, Switzerland and the United Kingdom other than by way of apublic offer. Given the lack of harmonisation of such laws and regulations, the author posed aseries of questions to his collaborators to order to compare, at least to a certain extent, theposition in the different jurisdictions. Unless stated to the contrary, the answers apply both toopen-ended and to closed-ended funds, whether in the form of an investment company or alimited partnership.

Issued byAlternative Investment Management Association (AIMA)

Lower Ground Floor, 10 Stanhope Gate, Mayfair, London W1K 1ALTel +44 (0)207 659 9920 Fax +44 (0)207 659 9921

E-mail – [email protected] Internet – http://www.aima.org

1Mr Cullen is a partner in the international law firm of Simmons & Simmons and Co-Chairman

of the Regulatory Committee of the Alternative Investment Management Association. The author isgrateful for the assistance of the following colleagues who were kind enough to review the contents of thisreport in relation to their respective jurisdictions: Dr. Friedrich Schwank, Law Offices Dr. F. Schwank(Austria); Frank de Paepe, Simmons & Simmons (Belgium); Catherine Kendal, Advokatfirmaet O. BondoSvane (Denmark); Antti Heikkilä, Roschier-Holmberg & Waselius (Finland); Colin Millar and Abdel-HamidMazouz, Simmons & Simmons (France) Michael Leistikow, Boesebeck Droste (Germany); James Levy,J.A. Hassan & Partners (Gibraltar); William Simpson, Ozannes (Guernsey); Mary McKenna, A & LGoodbody (Ireland); Andrew Baker, Cains (Isle of Man); Manfredi Vianini Tolomei, Simmons & SimmonsGrippo (Italy); David Moon, Mourant du Feu & Jeune (Jersey); Claude Kremer Arendt & Medernach(Luxembourg); Karin Schouwenberg, Nauta Dutilh (Netherlands); Ole Christian Hoie, Advokatfirmaet OleChristian Hoie (Norway); Paula Rosado Pereira, Grupo Legal Português (Portugal); Gonzalo F. Atela,Lexfide Estudio Juridico y Fiscal (Spain); Martin Börresen, Lagerlöf & Leman (Sweden); and JeanneTerracina, Schellenberg & Haissly (Switzerland).

mailto:[email protected]

AIMA Special Report: Marketing Hedge Funds (France, Germany, Switzerland, UK) © Simmons & Simmons, 19992

SSPPEECCIIAALL RREEPPOORRTTMMAARRKKEETTIINNGG HHEEDDGGEE FFUUNNDDSS

IINNDDEEXX

France 3

Germany 8

Switzerland 12

United Kingdom 18

Reproduction of part or all of the contents of this publication is strictlyprohibited, unless prior permission is given, in writing, by the author and

AIMA.

Alternative Investment Management Association (AIMA)Lower Ground Floor, 10 Stanhope Gate, Mayfair, London W1K 1AL

Tel +44 (0)20 7659 9920 Fax +44 (0)20 7659 9921E-mail – [email protected] Internet – http://www.aima.org



FRANCE

Are there established rules or guidelines, which distinguish between a public offeringand a private placement?

Yes. The new article 6 of Ordonnance n° 67-833 of 28 September 1967, (the “Ordonnance”),which was incorporated by article 30 of Law n° 98-546 of 2 July 1998 (the “Law”) has recast thedefinition of a public offering of securities requiring the preparation of a prospectus to be lodgedwith, and approved by, the Commission des opérations de bourse (the “COB”, the Frenchequivalent of the SEC) and introduced at the same time as a statutory exemption from thisrequirement.

Public offering: A public offering in France, known as a "public call for investment", is regardedas made where:

• a listing of financial instruments is sought on one of the regulated French financialmarkets, i.e. the stock markets (First Market, Second Market and New Market) and thefutures and options markets (MATIF and Monep); or

• the offering is advertised in France or French investors are solicited or a bank orinvestment services provider is appointed to market or place the offering with Frenchinvestors.

The rule applies to both primary offerings of currently unissued financial instruments andsecondary offerings by way of offers for sale of existing financial instruments.

The new article 6 of the Ordonnance refers to those financial instruments mentioned in Article 1of Law n° 96-597 of 02 July 1996. These are defined to include not only shares, stocks andbonds in French or foreign issuers but also a wide range of other securities including shares orunits in investment funds, exchange-traded and OTC futures and options as well as derivativeinstruments such as swaps, caps, collars and floors. The definition would cover investmentfunds, be they open-ended or closed-ended investment companies or in the form of limitedpartnerships.

It was therefore initially thought that the marketing of shares or units in investment funds fellwithin the public offering legislation and that the private placement exemption established by theLaw could be relied upon, if applicable, to place shares in funds without being subject toprospectus requirements.

However, COB regulation 98-08 (published on 2 March 1999), which implements the newlegislation concerning public offerings, limits the scope of the definition of financial instrumentsto shares, stocks and bonds issued by French and foreign issuers. The COB has explained thisrestriction by the fact that other securities (i.e. shares or units in investment funds, exchange-traded and OTC futures and options and derivative instruments) are separately regulated.

In view of the above, the COB considers that offerings of shares or units in investment funds donot fall within the scope of the recent public offering legislation. Consequently, an offeror ofshares or units in investment funds cannot rely on the private placement exemption establishedby the Law in order to avoid the application of prospectus requirements.


Which, if any, of the following categories of person in France could be contacted directby the fund/general partner, the investment manager or by their respectiverepresentatives:-

(a) individual investors;

(b) institutional investors (e.g. large corporates and funds of funds);

(c) pension funds;

(d) insurance companies?

Treasury consent: The prior authorisation of the Ministry of Finance (Treasury Department) isrequired for the issue, placing or sale in France of shares or units in collective investmentschemes constituted outside the European Economic Area (“EEA”): Article 10 of Decree n° 89-938 of 29 December 1989.

In our view, the requirement for Treasury consent will be triggered if an issue, placing or saleresults from a contact with the relevant French investor which has been initiated by the non-EEAfund (fund/general partner or the investment manager) or their respective representatives.

COB approval: In addition to the requirement for Treasury consent in respect of non-EEA funds,COB Regulation 98-04 provides that the marketing (commercialisation) in France of non-EEAfunds or EEA funds which do not comply with the UCITS Directive (it has been assumedthroughout that a hedge fund will not comply with the UCITS Directive) requires the priorapproval of the COB. The related COB Instruction of 15 December 1998 provides that theapplication for approval must be made on the same basis as for a French fund, but does notspecify what must be done in practice to reflect the fact that the applicant fund is not French.

Assuming approval is granted:

• the COB may require to be copied with all documents prepared or distributed by the fundand has the right to modify at any time the form and content of such documents;

• the person responsible for marketing the fund must enquire as to the aims, investmentexperience and financial position of the potential investor;

• the fund must be adapted to the situation of the potential investor;

• pertinent information must be provided to the potential investor in order to enable theinvestor to make an investment or disinvestment decision in full knowledge of the facts;and

• the person who markets the fund must alert the potential investor to the risks involved.

Again no guidance is given as to the practical steps to be followed as a consequence of thefund not being French.

It follows from the above that none of the categories of person referred to in this question maybe contacted without COB approval and, in the case of non-EEA funds, Treasury consent. Ifapproval is sought (and obtained) the categories of person which may be contacted will beagreed with the COB and the Treasury, as the case may be, although the policy of the COB andthe Treasury to date has been not to grant approval to offshore hedge funds.


Would the fund/general partner or the investment manager be able to gain access toindividual investors by, for example, marketing the shares/limited partnership intereststo banks who act on a discretionary basis for their customers?

No. As noted above, marketing even to banks is subject to COB and, possibly, Treasuryapproval.

Is there a numerical limit on the number of investors who may be approached or mayinvest in the shares/limited partnership interests? Does this limit differ according to theperson who conducts the marketing?

If COB and/or Treasury approval is sought, the number of investors who may be approached ormay invest in the fund will be agreed with the COB and/or Treasury (assuming approval isgranted).

The limit should not differ according to the person who conducts the marketing.

Assuming that some form of marketing is permissible, which of the following activitieswould be permitted:-

(a) mailing the prospectus/offering memorandum and other marketing material toinvestors;

(b) the fund/general partner or the investment manager’s representatives meetingwith potential investors in France;

(c) “road shows” or other group seminars/presentations in France;

(d) calling investors by telephone?

As noted above, COB approval will be required to “market” the shares/limited partnershipinterests in France and (for non-EEA funds) Treasury approval will be required to issue, place orsell the shares/limited partnership interests in France. There is no case law on what constitutesmarketing for the purposes of COB Regulation 98-04, although in its bulletin of February 1999,the COB published some practical guidelines in respect of the marketing of foreign funds toqualified investors in France. The COB considers that any “active” marketing of a foreign fundin France, regardless of the type of investor targeted, must receive prior authorisation.However, “passive” marketing, which the COB defines as marketing without advertising orsolicitation i.e. at the investor’s initiative, is unregulated.

Advertising: There is currently no legislation which specifically regulates advertising of funds,although articles in the press or advertising by means of literature made available to the Frenchpublic in places such as banks or by general mailing to potential investors will be regarded asprohibited advertising. On the other hand, the COB has accepted that general advertisementsin international financial publications, which are also published in France, do not constituteprohibited advertising. There would therefore be no restriction on advertising the shares/limitedpartnership interests in such publications.

Solicitation: Solicitation includes the carrying on of the following activities on a regular basis:visiting people at their domicile or at their place of work for the purpose of giving advice oninvestment in securities, or giving such advice in public places which are not intended for thispurpose as well as offering investment services or giving investment advice on a regular basisby sending letters or notes or by telephone. The activities mentioned at (a) to (d) inclusive would


fall under the definition of solicitation, whether carried out by the fund/general partner, theinvestment manager or by their representatives and whether in France or from abroad.

Would the shares/limited partnership interests be able to be issued to an individual whoapplied on a wholly unsolicited basis?

Yes, although for the reasons given above, it would be advisable to retain evidence that theindividual had not been solicited. For example, if in writing, the initial contact from the investorshould be kept on file.

Are there any advantages in having the shares/limited partnership interests listed on astock exchange (such as the Irish and/or Luxembourg Stock Exchange)?

There is no relevant advantage in the shares/limited partnership interests being listed.

On the other hand, if the shares/limited partnership interests were listed it would bring themwithin the scope of Article 18 of the Law of 28 March 1885 which provides that the public maynot be solicited, in whatever form and by whatever means, directly or indirectly, with a view totransactions on a foreign exchange in securities, negotiable forward contracts or any financialproducts unless the exchange has been recognised on terms laid down by decree and subjectto reciprocity arrangements. The relevant exchanges, which have been recognised to date, arethe major futures and options exchanges.

Article 18 was however amended in 1996 to the effect that its provisions, save insofar as theyrelate to the protection of public saving, do not apply to regulated exchanges whoseheadquarters are based in a Member State of the European Community. The COB does notappear to have relied upon the “protection of public saving” carve-out in Article 18 in relation toa European Community exchange - the legislation is principally aimed at unregulatedexchanges or markets in speculative products - and the risk of it so doing, particularly in thecase of a listing of the shares/limited partnership interests on the Luxembourg and, possibly,Irish Stock Exchanges can accordingly be regarded as very remote.

Can marketing which is conducted on a private placement basis rely on Englishlanguage documentation or is there any requirement to make French translationsavailable?

As indicated above, the private placement rules do not apply to the offering of shares or units infunds.

That said, pursuant to Law n° 94-665 of 4 August 1994 relating to the mandatory use of theFrench language (the “Toubon Law”), the French language must be used in connection with the“designation, offer, ..., description of the content or of the warranty conditions of a product or aservice” in the French territory. In addition, the Toubon Law provides that contracts entered intowith public entities or private entities performing a public service mission must, subject to limitedexceptions, be drafted in French.

A ministerial circular of 19 March 1996, relating to the application of the Toubon Law, providesin particular that all documents used for the purpose of informing consumers or users (inFrance), including prospectuses, brochures, catalogues or other information, documents, orderforms, warranty certificates, standard form agreements (insurance contracts, offers of financialservices), must be in the French language.


There does not appear to be any case law relating to the application of the Toubon Law inconnection with offers of financial products or instruments. The Toubon Law is drafted in wideterms, which may allow a judge to consider that any document aimed at French consumers -(there is no definition of the term “consumer” and it is therefore not possible to take a viewwhether it applies only to natural persons or would also cover corporates and institutions) -should be in French, and accordingly impose sanctions (mainly in the form of fines) in the caseof breach.

Leaving aside the question of public or quasi-public entities, the general view is that the ToubonLaw only applies where the document(s) in question are widely spread among the French publicor advertised in the French press. Indeed, the COB even accepts English languageprospectuses in relation to international offerings listed on the French Stock Exchange andwhich are technically available for investment by the public. Given that any proposed marketingactivities would not involve the distribution of documents to the public at large nor advertising inthe French press, it should be possible as a matter of practice to rely upon Englishdocumentation.

So far as regards public entities (for example, local authorities, the SNCF, EDF, GDF, FranceTelecom, the Post Office and the French equivalent of the National Savings Bank), and whilstthe matter is not free from doubt, it would appear necessary to prepare French versions of thecontractual documentation. On the other hand, this would not appear to be necessary for quasi-public entities as investment in the fund would be unrelated to their public service mission.

Is a “negative clearance” route available by which the regulatory authorities will confirmthat, if conducted in a particular way, the marketing of the shares/limited partnershipinterests will not infringe local marketing rules and regulations?

Prior to the introduction of the Law there existed an informal negative clearance procedurewhereby the COB (in liaison with the Treasury, as appropriate) would confirm whether themarketing of transferable securities would constitute a public call for investment requiring thepreparation of a prospectus. This procedure has now been superseded by the Law.

If the prospectus/offering memorandum were only distributed on a private placementbasis, should it contain any specific wording drawing attention to this?

Again, the offeror cannot rely on the private placement exemption. In addition, the question is,in principle, academic since marketing is unauthorised without COB and/or Treasury approval.

If there is a concern that the offering material might end up in the hands of a French investor, itis recommended that all written material provided to investors should contain a selling restriction(for example, in the form of a sticker) along the following lines:

“The shares/limited partnership interests may not lawfully be offered or sold inFrance. Approval for the marketing [, issue, placing or sale] [include if Treasuryconsent is required] of the shares/limited partnership interests has not beensought from the Commission des opérations de bourse [or the French Ministry ofFinance (Treasury Department)] [include if Treasury consent is required] andneither this document nor any other offering material or information has beensubmitted to the Commission des opérations de bourse.”


GERMANY

Are there established rules or guidelines which distinguish between a public offering anda private placement?.

German law does not establish a clear distinction between a public offering and a privateplacement. The Act Concerning the Distribution of Foreign Investment Shares and the Taxationof Their Proceeds which regulates the distribution of shares in a foreign investment fund to thegeneral public in Germany does not contain definitions of “public offering” and “privateplacement”. Likewise, the Securities Sales Prospectus Act which generally requires thepublication of a “sales prospectus” if an offer is made to the general public in Germany does notcontain definitions of these terms.

However, the German Federal Supervisory Office for Securities Trading has provided someguidelines as to the meaning of public offering and private placement under German law in itsAnnouncement Concerning the Securities Sales Prospectus Act dated April 15, 1996.

In the Announcement, “public offering” is defined as an offering for sale to an undefined numberof people, e.g., by advertising in any kind of media, circular letters etc., the recipients of whichare not yet known to the offeror. “Private placement” is defined as an offer made to a limitednumber of sophisticated private and/or institutional investors who do not require protection by aprospectus. Such limited number of addressees only exists, where they are previously andindividually known to the offeror and are selectively approached by the offeror on the basis ofindividual criteria.

With respect to the further distribution of shares acquired by way of private placement, it mightstill be considered a private placement if the recipient, doing business in Germany on a regularbasis, offers foreign investment shares to its previously known clients within the scope of regularconsulting on investment and other financial matters.

However, whether a particular activity qualifies as a public offering or private placement needsto be reviewed on a case-by-case basis. In general, German authorities and courts tend tointerpret public offering as broadly as possible, and private placement as narrowly as possible.

Which, if any, of the following categories of persons in Germany could be contacteddirect by the fund/general partner, the investment manager or by their respectiverepresentatives:

(a) individual investors

(b) institutional clients (e.g. large corporates and funds of funds);

(c) pension funds;


Provided the marketing of shares/limited partnership interests in the fund qualifies as a privateplacement, the fund/general partner/investment manager or their respective representativesmay directly contact any of the above-mentioned categories of persons in Germany.



Marketing the share/limited partnership interests to a bank is an additional means of gainingaccess to individual investors, provided that it is done by way of a private placement.

Is there a numerical limit on the number of investors who may be approached, or mayinvest in the shares/limited partnership interests? Does this limit differ according to theperson who conducts the marketing?

The German Federal Supervisory Office for Securities Trading does not state a specificnumerical limit in its Announcement dated April 15, 1996, but requires the offering to be made"to a limited number of sophisticated private and/or institutional investors” in order to qualify asprivate placement. A placement should be deemed to be a private placement where less than80 investors are concerned and will usually be treated as public offering where more than 200potential investors are addressed. Generally, it does not make any difference who conducts themarketing in Germany.

Assuming that some form of marketing is permissible, which of the following activitieswould be permitted:


(b) the fund/general partner or the investment manager's representatives meetingwith potential investors in Germany;

(c) “road shows” or other group seminars/presentations in Germany;


Mailing of the prospectus/offering memorandum and other marketing material toinvestors: According to section 1 of the Law Against Unfair Competition, a person who acts incommercial transactions for purposes of competition contrary to honest practices is subject toclaims to refrain from acting and to damages. In general, it is not prohibited to mail letters,whether uninvited or not, provided that the content of such letters does not infringe any otherstatutes or principles under German law. Therefore, it should be permitted to mail the Fund’sprospectus/offering memorandum and other marketing material to potential investors inGermany, provided the mailing keeps within the scope of a private placement.

Uninvited fax marketing activities are considered to violate section 1 of the Law Against UnfairCompetition if the investor has not declared his explicit or implied consent which, for instance,may be assumed in connection with an existing business relationship. Uninvited fax marketing isviewed as illegal cold calling (see below).

The fund/general partner or the investment manager’s representatives meeting withpotential investors in Germany: Under the Law Against Unfair Competition, uninvited andunannounced sales visits are admissible, except where the marketing agent or employeerestricts the investor's free contractual will by taking advantage of the investor's surprise ordeception caused by the visit.

However, according to section 56 of the Trade Code, the sale of securities (including shares inforeign investment funds) is prohibited if it is part of any form of itinerant trade. An itinerant tradeis defined as the commercial offer or purchase of goods or services by an independent or


dependent person without prior invitation outside of his place of business. Whilst meremarketing does not qualify as an itinerant trade the sale of securities does so qualify.

For sales visits regard must also be had to the special provision in section 1 of the ActRegarding Revocation of Door to Door and Similar Dealings, according to which an investormay revoke a contract within a period of one week (for closed-ended funds) or two weeks (foropen-ended funds) if the following requirements are met:

- the investor is induced to conclude the contract by negotiations at work, home,during leisure activities, in public areas or on public transportation; and

- the solicitation had not been requested by the investor.

Section 1 of the Act Regarding Revocation of Door to Door and Similar Dealings does not applyif the investor is contracting in the performance of an independent professional activity.

“Road shows” or other group seminars/presentations in Germany: There is generally noobjection to organising roadshows or other presentations in Germany, provided that thespeeches held and the materials distributed do not infringe any statutes or principles underGerman law. However, in order to stay within the scope of a private placement, only previouslyknown potential investors should be permitted to attend such roadshows.

Calling investors by telephone: Marketing by telephone is characterised as illegal cold callingif all of the following elements are fulfilled:

- a representative, agent, merchant or other professional offers by telephonegoods or services which includes shares in foreign investment funds ; and

- the telephone call has not been requested by the customer; and

- the customer has not declared his explicit or implied consent to telephonemarketing.

Case law states that it is illegal both to announce telephone marketing in writing, and to preparesales visits by uninvited telephone calls. Any uninvited telephone call is an illegal interference inthe telephone holder's privacy. This rule also applies if a person who is already in contractualrelations with a company is called by telephone to market further or new products of thecompany. Only telephone calls connected with existing contracts do not infringe section 1 of theLaw Against Unfair Competition. These rules generally apply to telephone marketing directedboth to private and institutional investors.

The implied consent of an investor to telephone marketing can be assumed if he either had abusiness relationship with the marketing company before, or where the telephone marketing isin the investor’s best interest. Since institutional investors are usually interested in obtaininginformation on investment funds, an implied consent can virtually always be assumed and,therefore, the requirements for telephone marketing to institutional investors are not asrestrictive as for private persons.


Yes. The issuance of shares/limited partnership interests to an individual who applied on awholly unsolicited basis would not conflict with the principles governing private placementsunder German law.


Are there any advantages in having the shares/limited partnership interests listed on anexchange (such as the Irish and/or Luxembourg Stock Exchange)?

Shares in a foreign investment fund which are admitted to listing on a German stock exchangeand fall under the conditions set forth in section 17 of the Foreign Investment Companies Actwill generally enjoy favourable tax treatment. The listing of the shares as such would not bedeemed to imply publicity. Publications required by the stock exchange will not be deemed toconstitute a public offering. Any other marketing, i.e. publications not required by the exchangerules, is prohibited. If a foreign investment fund is already officially listed on a stock exchangewithin the European Community or in the European Economic Area, there are some reliefsavailable with respect to the official listing of its shares in Germany.

Can marketing which is conducted on a private placement basis rely on Englishlanguage documentation or is there any requirement to make German translationsavailable?

There are no specific requirements for a prospectus/offering memorandum used in a privateplacement to be in German. However, if the potential investor's command of the Englishlanguage is not sufficient to fully understand the prospectus/offering memorandum, liability mayarise under the principle of prospectus liability. The information contained in theprospectus/offering memorandum must be correct in all respects and complete in order toprovide the potential investor with all information he reasonably needs in making an investmentdecision.


It is, in principle, possible to contact the German Federal Supervisory Office for SecuritiesTrading in order to check whether or not the intended manner of distribution, in its opinion,qualifies as a private placement. An informal inquiry could probably be processed within arelatively short period. However, there does not exist a formal procedure for negativeclearances and, therefore, no right to request a binding confirmation in this respect.


It might be helpful if the prospectus/offering memorandum expressly indicates that it isconfidential and for the information of the addressee only and must not be circulated to otherpeople. However, such wording is not sufficient to qualify an offering as a private placement. If,for instance, a bank displays the prospectus/offering memorandum in its business premisesaccessible to all of its customers this will be construed as a public offering notwithstanding theabove remarks.

In addition, it should be noted that, even if the placement is strictly private, the issuer of theoffering memorandum and the entity managing the fund will be subject to prospectus liabilityunder German law. Accordingly, the information contained in the prospectus/offeringmemorandum must be correct in all respects and complete in order to provide the potentialinvestor with all information he reasonably needs when making his investment decision.


SWITZERLAND** Pending update of this report, please note that the Swiss regulations have been amended sincepublication of this report in 1999.

Are there established rules or guidelines which distinguish between a public offering anda private placement?

The marketing of shares or interests in investment funds in Switzerland is governed by theSwiss Federal Law on Mutual Fund which came into force on January 1, 1995 (the "1995 Law"),supplemented by two Implementing Ordinances issued respectively by the Federal Council andby the Federal Banking Commission (the "Banking Commission"). In addition, regard must behad to three Directives issued by the Banking Commission in March, April and May 1995.

The 1995 Law defines foreign investment funds in a variety of ways and the definition issufficiently wide to cover unit trusts, open-ended investment companies, SICAVs, fondscommuns de placement and mutual funds. The 1995 Law distinguishes in its Article 44 thefollowing categories of foreign investment funds:-

(a) pools of assets created pursuant to a collective investment contract (or other type ofcontract with the same effect) and managed by a management company whoseregistered office and administrative headquarters are outside Switzerland;

(b) companies whose registered office and administrative headquarters are outsideSwitzerland and whose objective is collective investment, provided that an investor hasthe right to require the company itself or a company associated with it to redeem hisshares;

(c) any other foreign pools of assets or foreign companies which are subject to supervisionin their home country as investment funds (to the extent that interests in them aremarketed or distributed in Switzerland).

A limited partnership is likely to be caught by the definition in paragraph (a) above if the limitedpartnership agreement is to be interpreted as a "collective investment contract or another typeof contract having the same effect" and if the general partner itself manages the investments ofthe partnership or delegates this function to another company. Alternatively, a limitedpartnership could be caught by the definition in paragraph (c) if it constitutes a "foreign pool ofassets" and if it is supervised as an investment fund in the jurisdiction in which it is established.

The 1995 Law does not expressly refer to "closed-ended funds". Hence, it is unclear whether"closed-ended funds" qualify as foreign funds under the 1995 Law. The Banking Commissionhas indicated in a writing in 1996 that three different categories of "closed-ended funds" shouldbe distinguished :

a) "Closed-ended funds" which are subject to standards of supervision as investment fundsin their home country comparable to those applicable in Switzerland. These funds mayobtain a licence authorising the distribution of their shares in Switzerland, provided thatthe licence requirements are met;

b) "Closed-ended funds" which are subject to standards of supervision which are notconsidered comparable to those applicable to investment funds in Switzerland. In suchcase, no licence may be obtained;


c) "Closed-ended funds" which are not subject to supervision as investment funds in theirhome country. As these foreign funds do not fall within the definition of "foreign funds"contained in Article 44 of the 1995 Law, their distribution is not restricted, provided,however, that the investment vehicles in question are not designated as "investmentfunds" or a similar expression which may cause deception or confusion.

It follows from the foregoing that if a "closed-ended fund" is subject to supervision as aninvestment fund in its country of incorporation, the provisions of the 1995 Law are applicable.Conversely, shares or interests in a "closed-ended fund" which is not subject to supervision inits country of corporation may be distributed without any licence requirement, provided that noexpression such as "fund" or "investment fund" is used.

Offerings subject to licence: According to Article 45 of the 1995 Law, any person who "offersor distributes shares in foreign funds, on a professional basis, in or from Switzerland" must belicensed to that effect by the Banking Commission.

A licence is required where:

a) the foreign investment vehicle qualifies as a foreign investment fund (see above); and

b) the shares in the foreign fund are offered or distributed on a professional basis in or fromSwitzerland (see below); and

c) the activities conducted in Switzerland do not benefit from the institutional investorsexemption (see below).

The relevant criteria for the determination of what constitutes an offering or distribution and whatis meant by "on a professional basis" are discussed below.

The institutional investors exemption: An amendment to the Federal Council's ImplementingOrdinance to the 1995 Law, which came into force on 1 November 1997, provides for anexemption for certain marketing activities to institutional investors. This amendment allowsofferings or distribution of foreign investment funds in or from Switzerland without a licence, tothe extent that such offerings or distribution are addressed exclusively to investors whoseassets are managed professionally (e.g., banks, insurance companies, pension funds, etc.) andthat no public offer is made. By this amendment, the concept of "public offer" as known underthe previous Swiss legislation has been reinstated with respect to offerings or distribution toinstitutional investors. The Banking Commission has indicated that the purpose of thisexemption is to allow offerings or distribution, road shows, etc. addressed to a limited number ofpotential institutional investors.

The concept of professional offer or distribution: Marketing activities carried out inSwitzerland are subject to a licence requirement if

(a) an "offering or distribution" of shares of foreign funds takes place in or from Switzerland;and

(b) such "offering or distribution" is made "on a professional basis".

It is important to note in this connection that the Banking Commission considers the concept of"offering or distribution on a professional basis" to be broader than the concepts of "public offer"and "public solicitation" as known under previous legislation. Accordingly, as a rule, any form of"advertising" of a foreign fund will be subject to a licence requirement. No private placementexemption, as known in other jurisdictions, is available in respect of the offering or distribution offoreign funds in Switzerland, except for the professional investors exemption described above.

The first element of "offering or distribution" is broadly construed by the Banking Commission,which considers that any form of promotion of shares in a foreign investment fund in Switzerlandor directed at investors or potential investors in Switzerland will be subject to a licence


requirement (unless the institutional investors exemption is available). However, the BankingCommission has indicated in writing that marketing or distribution activities will only constitute"advertising" if directed at investors or potential investors (e.g. the placing of shares in a foreignfund with a Swiss bank which subscribes for its own account; the organisation of publicmeetings or meetings with the press; or the distribution of prospectuses to potential investors).Conversely, a foreign fund or its selling agent will not, according to the Banking Commission, besubject to a licence requirement if it limits its marketing activities to sending a prospectus to, ormeeting with, Swiss banks or financial institutions which are not themselves potential investors,provided that no public offer is made.

In the absence of a definition of the phrase "on a professional basis" in the legislation, theBanking Commission issued guidelines in 1996 outlining what it regards as cases typicallyrequiring or not requiring licences as the case may be. Summarising these guidelines, Swissbanks and financial institutions will not be considered to be offering or distributing shares in aforeign investment fund "on a professional basis" so long as the following conditions are met :

(a) no formal distribution agreement exists between the Swiss bank or financial institutionand the fund; and

(b) the customer on his own initiative issues a purchase or subscription order for shares in aforeign investment fund without any recommendation to that effect from the Swiss bankor financial institution; or

(c) shares are placed by the Swiss bank or financial institution in customers' discretionaryaccounts which it manages, provided that shares of the same fund are not systematicallyacquired for those accounts; and

(d) shares in the foreign investment fund are not advertised.

It will be noted that the criteria described above relate only to the position of Swiss banks andfinancial institutions. They do not deal with the circumstances in which a foreign investment fundor its selling agent will not be considered to be marketing or distributing shares in the fund inSwitzerland on a professional basis, and hence not subject to the licence requirement, when thefund or its selling agent promotes shares to Swiss banks and financial institutions.

The Banking Commission has thus far consistently refused to indicate a "magic figure" of(potential) investors who could be contacted without a licence, even in the scope of theinstitutional investors exemption.

It results, in sum, from the foregoing that the following marketing activities may be carried out inor from Switzerland without a licence:

- offerings, road shows, group seminars/presentations addressed to a limited number ofinvestors whose assets are managed professionally (e.g. banks, insurance companies,pension funds, etc.), provided that no public offer is made; or

- sending a prospectus to, or meeting with, banks or financial institutions which are notthemselves potential investors (in other words, if they are not subscribing for their ownaccount, but solely for the account of their customers), provided that no public offer ismade. In such case, marketing or distribution of interests in foreign funds would be theresponsibility of the banks or financial institutions who may be required to obtain alicence. This would, for example, apply in cases of systematic placement of interests inthe Fund in customers' discretionary accounts managed by the banks or financialinstitutions.


Which, if any, of the following categories of person in Switzerland could be contacteddirect by the fund/general partner, the investment manager or by their respectiverepresentatives:-



(c) pension funds;


No direct contacts aimed at marketing foreign funds may be made on an unsolicited basis in orfrom Switzerland with individual investors in the absence of a licence of the BankingCommission. An exemption with respect to institutional investors was brought about on 1November 1997 by the enactment of an amendment to the Implementing Ordinance of theFederal Council. This amendment allows offerings or distributions of shares of foreign fundswithout a licence to Swiss institutional investors, as long as no public offer is made in or fromSwitzerland for such funds. The term "institutional investors" is defined as entities whose assetsare managed professionally, i.e. Swiss banks, insurance companies, pension funds, etc. TheBanking Commission has indicated that this exemption is to be understood to allow offerings ordistribution addressed to a limited number of potential institutional investors.


Yes, the fund/general partner, the investment manager and/or the respective selling agentswould within prescribed limits be able to gain access to individual investors by marketingshares/limited partnership interests to Swiss banks or financial institutions who act on adiscretionary basis for their customers, provided that no public offer is made. Such marketingactivities should be limited to sending a prospectus or meeting with Swiss banks or financialinstitutions. No mass mailing should be made. It should be stressed that no distributionagreement should be entered into between the fund and the bank or financial institution, andthat shares of the same fund may not be systematically acquired for those accounts.

Is there a numerical limit on the number of investors who may be approached or mayinvest in the shares/limited partnership interests? Does this limit differ according to theperson who conducts the marketing?

Neither the 1995 Law nor the amendment to the Implementing Ordinance of the Federal Councilproviding for an "institutional investors exemption" refer to a numerical limit. As mentionedabove, the Banking Commission has consistently refused thus far to indicate a "magic number"of (potential) investors who could be contacted without a licence, even within the scope of theinstitutional investors exemption. It may be noted, however, that in Swiss legislation concerningbanks and securities dealers, the concept of "public offer" consistently refers to a maximum of20 customers.




(b) the fund/general partner or the investment manager’s representatives meetingwith potential investors in Switzerland;

(d) “road shows” or other group seminars/presentations in Switzerland;

(e) calling investors by telephone?

These forms of marketing are admissible provided that they take place either at the unsolicitedrequest of a potential investor or within the ambit of the institutional investors exemption.

Road shows or group seminars/presentations are admissible within the institutional investorsexemption, i.e. provided that they are made to representatives of a limited number ofinstitutional investors.

Calling potential investors by telephone will be qualified as a public offer, subject to licence fromthe Banking Commission, unless the calls are made to a limited number of banks or financialinstitutions which are not themselves potential investors.

Are there any provisions which would render it unlawful for an investor to invest in theshares/limited partnership interests?

There is no general provision of Swiss law which would render it unlawful for an individualinvestor to invest in the shares/limited partnership interests.


Yes, the shares/limited partnership interests would be able to be issued to an individual investorwho applied on an unsolicited basis. It would be advisable to document the unsolicited requestby means of written instructions emanating from the individual investor.


From a regulatory point of view, there is no advantage to having the shares/limited partnershipinterests listed on a stock exchange.

Can marketing which is conducted on a private placement basis rely on Englishlanguage documentation or is there any requirement to make Swiss translationsavailable?

As mentioned above, no private placement exemption, as known in other jurisdictions, isavailable in Switzerland. Offerings of shares/limited partnership interests within the scope of theinstitutional investors exemption or addressed to banks or financial institutions who may


subscribe or purchase shares for placement in their customers' discretionary accounts -provided that no public offer is made - may rely on English language documentation.

The translation of the documentation into a Swiss official language is required only within thecontext of an application for a licence for marketing in Switzerland.


The interpretation by the Banking Commission of the 1995 Law and its ImplementingOrdinances as well as the guidelines from time to time issued by the Banking Commission areinconsistent. Hence, as a rule, no negative clearance is needed before conducting marketingactivities which do not amount to an offering or distribution "on a professional basis", or whichfall within the scope of the institutional investors exemption.

The Banking Commission is unwilling to allow exceptions to its consistent practice by way ofnegative clearance. However, it is recognised that the concepts of "offering or distribution on aprofessional basis" and "systematic placement" as well as that of "public offer" referred to in theinstitutional investors exemption are not precisely defined and may leave room for interpretation.A negative clearance route is available where the criteria mentioned in the guidelines issued bythe Banking Commission are insufficient to determine whether a proposed offering may beconducted without a licence (i.e. does not amount to a public offer), in other words where thereis a grey area. It should be noted that a request for negative clearance must contain all detailsof the proposed marketing of shares/limited partnership interests, with indication of names of thefund, its selling agent, the number of potential investors concerned, the method of marketingenvisaged, etc. The policy of the Banking Commission is not to issue any general negativeclearance on a "no name basis".


Although no guidelines have been issued by the Banking Commission with respect to a warninglegend in prospectuses of foreign funds, the following legend to be useful to warn potentialinvestors:

“The Fund has not been authorised by the Swiss Federal Banking Commissionas a foreign investment fund under Article 45 of the Swiss Federal law oninvestment funds of March 18, 1994. Accordingly, interests in the Fund may notbe offered or distributed on a professional basis in or from Switzerland, and thisMemorandum may not be issued in connection with any such offer or distribution.Interests in the Fund may, however, be offered and this Memorandum may bedistributed in Switzerland on a professional basis to a limited number ofprofessional investors in circumstances such that there is no public offer.”


UNITED KINGDOM

Are there established rules or guidelines which distinguish between a public offering anda private placement?

Yes, but only in relation to closed-ended investment companies since such companies falloutside the definition of “collective investment scheme”.

If the marketing of shares in a closed-ended investment company to persons in the UK were toconstitute an offer of securities to the public in the UK, it would be necessary to prepare aprospectus in accordance with the Public Offers of Securities Regulations 1995 (the “POSRegulations”).

An offer of securities is made to the public if it is made to the public and none of the exceptionsset out in paragraph 7 of the POS Regulations applies in relation to the offer. The POSRegulations do not provide an exhaustive definition of “public” for this purpose, but do providethat an offer which is made to any section of the public, whether selected as members of a bodycorporate or as clients of the person making the offer, or in any other manner, is to be regardedas made to the public. Only offers made to persons in the UK are taken into account, and anypart of an offer made to persons outside the UK is disregarded when determining whether anoffer is made to the public.

Given the wide definition of “public”, the fund and the investment manager must ensure that anymarketing activities in the UK are restricted so that reliance can be placed on one or more of theprincipal relevant exceptions set out in paragraph 7 of the POS Regulations.

The principal relevant exceptions in paragraph 7 of the POS Regulations are likely to be the“professionals’” exception, the “no more than 50 persons” exception and the “minimumconsideration” exception.

The professionals’ exception will apply and an offer of shares in the fund will not constitute anoffer of shares to the public where they are offered to persons:

(a) whose ordinary business involves them in acquiring, holding, managing ordisposing of investments (as principal or agent) for the purposes of theirbusinesses; or

(b) who it is reasonable to expect will acquire, hold, manage or dispose ofinvestments (as principal or agent) for the purposes of their businesses;

or are otherwise offered to persons in the context of their trades, professions or occupations.

This exception applies to offers made to a wide range of professional investors and includes notonly those in “financial” businesses such as securities dealers and fund managers but also thetreasury and investment functions of industrial companies and financial institutions (of whateversize).

In addition, an offer of shares in the fund will not constitute an offer of shares to the public in theUK if the shares are offered to no more than 50 persons. In counting the number of persons towhom an offer is made, offers to persons who are outside the UK or who fall within one of theother exceptions (eg the professionals’ exception) can be disregarded. In other words, theprofessionals’ exception and the no more than 50 persons exception are cumulative so that anoffer can be made to any number of professionals (as defined) and 50 or fewer non-professionals without giving rise to an offer of securities to the public in the UK.


However, it is crucial to appreciate that it is the number of persons to whom an offer is madewhich is relevant, not the number who accept an offer. In other words, the number of persons inthe UK (a) to whom the prospectus/offering memorandum and any other promotional documentmay be sent and (b) who are offered shares in the fund during a personal visit or verbalcommunication (eg by telephone) must not exceed 50 in aggregate. Moreover, the POSRegulations do not specify in what capacity (agent or principal) the offeree must be acting. Thebetter view is that those who count towards the 50 person total are those recipients of the offerwho are able to respond to it without reference to another person. For example, if an offer ismade to one person with a view to it being communicated to several other persons for theirconsideration, then those others count towards the 50 person total; but an offer to adiscretionary fund manager is an offer to one person, notwithstanding that he may choose toaccept the offer on behalf of many clients. In addition, an offer made to several persons jointly,such as trustees or the members of a partnership in their capacity as such, is an offer to a singleperson.

Lastly, an offer of shares in the fund will not constitute an offer of shares to the public in the UKif the minimum consideration which may be paid by any person for shares acquired by himpursuant to the offer is Euro 40,000 (or an equivalent amount in another currency).

Which, if any, of the following categories of person in the United Kingdom could becontacted direct by the fund/general partner, the investment manager or by theirrespective representatives:-



(c) pension funds;


The restrictions applicable to the marketing of a fund in the UK differ depending upon whetherthe fund is a collective investment scheme (the definition of which includes an open-endedinvestment company and an open-ended or closed-ended limited partnership) or a closed-ended investment company, and upon whether the fund is being marketed by a person who isauthorised under the Financial Services Act 1986 (“FSA”) or by a person who is not authorisedunder the FSA.

Marketing by Unauthorised Persons

The fund may, whether it is a collective investment scheme or a closed-ended investmentcompany, subject to the restrictions and exceptions described below and assuming in the caseif a closed-ended investment company that there is no offer to the public (see above), bemarketed in the UK without the need for the fund/general partner or the investment manager toobtain authorisation under the FSA, provided that neither the fund/general partner nor theinvestment manager does so from a permanent place of business maintained by it in the UKand that reliance is placed on the overseas person exemption.

The fund/general partner and the investment manager will qualify as an overseas person for thispurpose provided that it does not carry on investment business for the purposes of the FSAfrom a permanent place of business maintained by it in the UK. The overseas personexemption is contained in paragraph 27 of Schedule 1 to the FSA and provides that anoverseas person’s activities of offering or agreeing to sell investments as agent to a person inthe UK, offering or agreeing to arrange deals in investments for a person in the UK or giving a


person in the UK investment advice will not constitute regulated investment business if thetransaction, offer, agreement or advice is the result of:

(a) an approach made to the overseas person by or on behalf of the person in theUK which either has not been in any way solicited by the overseas person or hasbeen solicited by him in a way which has not contravened Section 56 of the FSA(which deals with cold calling) or Section 57 of the FSA (which deals with theissue of investment advertisements); or

(b) an approach made by the overseas person which has not contravened eitherSection 56 or Section 57 of the FSA.

Restrictions on Advertising: Section 57(1) of the FSA provides that no person other than anauthorised person may issue or cause to be issued an investment advertisement in the UKunless its contents have been approved by an authorised person.

An investment advertisement is widely defined for this purpose to mean “any advertisementinviting persons to enter or offer to enter into an investment agreement [which would include anagreement to subscribe for shares/limited partnership interests in the fund] … or containinginformation calculated to lead directly or indirectly to persons doing so”. Accordingly, the fund'sprospectus/offering memorandum, any other promotional document and any letter under coverof which it or they are distributed by the fund/general partner or the investment manager topersons in the UK will constitute “investment advertisements” for the purposes of Section 57 ofthe FSA.

Breach of Section 57 of the FSA is a criminal offence which is punishable on indictment by aterm of up to 2 years’ imprisonment and an unlimited fine. In addition, any person who enteredinto an investment agreement such as an agreement to subscribe for shares/limited partnershipinterests in the fund as a result of a contravention of Section 57 may be entitled to rescind hissubscription and to claim compensation.

The fund/general partner and the investment manager will, however, be able to take advantageof certain exceptions from the Section 57 restriction on advertising which are contained inOrders made by the Secretary of State under the FSA.

Exceptions to the Restrictions on Advertising: The principal relevant exceptions arecontained in the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order1996 (the “Exemptions Order”). The Exemptions Order provides that an unauthorised person(such as the fund/general partner and the investment manager) may issue investmentadvertisements (such as the prospectus/offering memorandum and any other marketingdocument and covering letter) to any person in the UK whom it reasonably believes to fall withinany of the following categories:

(a) persons authorised under the FSA to carry on investment business in the UK.This will include merchant banks, stockbrokers, securities houses, investmentmanagers, insurance companies and financial intermediaries;

(b) European investment firms carrying on home-regulated business in the UK underthe European passport for investment business provided by the InvestmentServices Directive or the Second Banking Coordination Directive;

(c) persons who are exempt form the requirement for authorisation under the FSA.This will include banks who appear on the Bank of England’s list of wholesalemoney market institutions, as well as Lloyd’s underwriting agents as respectsinvestment business carried on by them in connection with or for the purpose ofinsurance business at Lloyd’s. There are, however, proposals which will shortlyrequire Lloyd’s managing agents to become persons authorised under the FSA.


(d) a body corporate which either:

(i) has more than 20 shareholders or is the subsidiary of a holding companywhich has more than 20 shareholders and it, or any of its holdingcompanies or subsidiaries, has a called-up share capital or net assets ofat least £500,000;or

(ii) if it is a body corporate having less than 20 shareholders and is not thesubsidiary of a holding company which has more than 20 shareholders, itor any of its holding companies or subsidiaries, has a called-up sharecapital or net assets of at least £5 million;

(e) an unincorporated association (for example, a partnership) having net assets ofnot less than £5 million;

(f) a United Kingdom local or public authority;

(g) a trustee of a trust where the aggregate value of the cash and investments whichform part of the trust’s assets (before deducting the amount of its liabilities) is £10million or more or has been £10 million or more at any time during the previoustwo years. This will cover the trustees of pension funds of any significant size;

(h) a person acting in his capacity as a director, officer or employee of an entity of atype described in paragraph (a) to (f) above (ie he must not be acting on his ownpersonal account) whose responsibilities, when acting in his capacity as adirector, officer or employee of such an entity, involve him in engaging ininvestment business activities as defined in the FSA;

(i) persons who are existing shareholders in the fund if it is an open-endedinvestment company, provided that the advertisement contains no invitation orinformation which would make it an investment advertisement other than aninvitation or information relating to shares in the fund. This will only be relevantafter the close of the initial offer period; and

(j) any person to whom the fund/general partner or the investment manager has, inthe course of carrying on investment business, effected or arranged for theeffecting of a transaction or given investment advice in each case within a periodof 12 months prior to the issue of the relevant investment advertisement andwhere the relevant transaction or advice was effected or arranged or given at atime when the recipient was neither resident nor had a place of business in theUK.

The prospectus/offering memorandum, any other promotional document and any covering lettermay be sent to any persons whom the fund/general partner or the investment managerreasonably believes to fall within any of the categories referred to at (a) to (i) above. Thestandard of reasonable belief requires that some enquiry be made in cases of any doubt inorder to ascertain (for example, in the case of a body corporate) the adequacy of its net assetsor called-up share capital, for example by obtaining copies of its most recently publishedaccounts. In respect of category (j) above, the prospectus/offering memorandum, any otherpromotional document and any covering letter may only be sent to persons who actually fallwithin that category – reasonable belief is not sufficient.

It is important to note that there is no exemption available to the fund/general partner or theinvestment manager in relation to “sophisticated” or “high net worth” individuals as such.Accordingly, save in the circumstances mentioned in categories (i) and (j) above, no individualin his private capacity may be sent a copy of the prospectus/offering memorandum, any otherpromotional document or any covering letter by the fund/general partner or the investment


manger, nor should such persons by the subject of unsolicited telephone contact or personalvisits.

Restrictions on Cold Calls: Section 56 of the FSA states that no person shall in the course of,or in consequence of, any unsolicited call made on a person in the UK or made from the UK ona person elsewhere, by way of business, enter into an investment agreement with the person onwhom the call is made or procure or endeavour to procure that person to enter into such anagreement.

For the purposes of Section 56 an “unsolicited call” means a personal visit or oralcommunication made without “express invitation”. Unsolicited mail is not therefore covered bySection 56.

Section 56 covers unsolicited calls made on a person in the UK even if the call originatesoutside the UK and thus restricts the extent to which an overseas person may marketinvestments in this way. Accordingly, if representatives of the fund/general partner or theinvestment manager were to make personal visits or oral communications (for example, bytelephone) to persons in the UK without their express invitation, these would constituteunsolicited calls.

Although unsolicited calls are not prohibited as such and Section 56 does not create a criminaloffence, it renders any investment agreement concluded as a result of the unsolicited callunenforceable by the caller. Accordingly, any subscription for shares/limited partnershipinterests in the fund made by a person in the UK as a result of an unsolicited call byrepresentatives of the fund/general partner or the investment manager would be unenforceableand, in addition, the person called would be entitled to recover any money paid in subscribingfor shares/limited partnership interests in the fund, together with compensation (for example, toreflect loss of interest) for any loss suffered as a result.

Exceptions to the Restrictions on Cold Calls: There are certain exceptions to the coldcalling restrictions described above. These are set out in the Common Unsolicited CallsRegulations 1991 (the “Regulations”).

The principal relevant exception in the Regulations is that an overseas person, such as thefund/general partner or the investment manager, may make unsolicited calls on a “non-privatecustomer”. This exception allows the fund/general partner or the investment manager toprocure or endeavour to procure a person to purchase shares/limited partnership interests in thefund if the call is made with a view to the investor purchasing shares as a non-private customer.However, the caller must be able to demonstrate that he believes on reasonable grounds at thetime of the call that the exception is available.

A non-private customer for this purpose includes an individual, but only if he is acting in thecourse of investment business, and a body corporate, a partnership or a trustee acting for atrust which meets certain size requirements enabling the body corporate, partnership or trusteeto be treated as an “ordinary business investor”. The relevant size requirements for an “ordinarybusiness investor” are:

(a) in the case of a body corporate which has more than 20 shareholders or is thesubsidiary of a holding company which has more than 20 shareholders where it,or any of its holding companies or subsidiaries, has a called-up share capital ornet assets of £500,000 or more;

(b) in the case of a body corporate which has less than 20 shareholders and is notthe subsidiary of a holding company which has more than 20 shareholders,where it, or any of its holding companies or subsidiaries, has a called-up sharecapital or net assets of £5 million or more;

(c) in the case of a partnership, where it has net assets of £5 million or more; or


(d) in the case of a trustee of a trust, where the aggregate value of the trust’s assets(before deducting the amount of its liabilities) is £10 million or more or has been£10 million or more at any time during the previous two years.

The Regulations would therefore allow the fund/general partner and/or investment manager tomake unsolicited calls on persons falling within sub-paragraphs (a) to (g) above in relation to theexceptions from the restrictions on advertising without triggering the unenforceability of anysubscription for shares/limited partnership interests in the fund by such persons.

Marketing by an Authorised Person

In the event that the investment manager is authorised under the FSA (which will be the casewith UK-based hedge fund managers), it will be able to market shares/limited partnershipinterests in the fund, if it is a collective investment scheme (an “unregulated scheme”), to widercategories of person than those to whom an unauthorised person may market the fund by virtueof Section 76 of the FSA.

Restrictions on Advertising: Section 76 of the FSA provides, in summary, thatadvertisements which invite persons to become or offer to become, or contain informationcalculated to lead directly or indirectly to persons becoming, participants (ie shareholders orlimited partners) in an unregulated scheme, may not be issued in the UK by an authorisedperson and that authorised persons may not advise or procure any person in the UK to becomeor offer to become a participant in such a scheme, subject in either case to a number ofexceptions set out in Section 76(2) of the FSA and contained in regulations issued by theFinancial Services Authority (formerly the SIB) under Section 76(3) of the FSA.

Breach of Section 76 is not a criminal offence. Section 95 of the FSA provides, however, that abreach of Section 76 by an authorised person is to be treated as a breach of the conduct ofbusiness rules to which it is subject. Such a breach may therefore give rise to an action fordamages under Section 62 of the FSA (where the fund is promoted to private investors) and todisciplinary action by its regulator.

Exceptions to the Restrictions on Advertising: Section 76(2) of the FSA will allow theinvestment manager to market shares/limited partnership interests in the fund to other personsauthorised under the FSA and to persons whose ordinary business involves the acquisition anddisposal of property of the same kind as the property, or a substantial part of the property, towhich the fund relates.

More usefully, the Financial Services (Promotion of Unregulated Schemes) Regulations 1991issued by the Financial Services Authority under Section 76(3) of the FSA will permit theinvestment manager to market shares in the fund, inter alia, to prospective UK investors whom itreasonably believes fall within one or more of the following categories:

(a) Existing shareholders/limited partners in the fund and certain other schemes:The fund may be promoted to existing shareholders/limited partners in the fund(which will only be relevant after the end of the initial offer period) and existingshareholders/limited partners in other unregulated schemes whose underlyingproperty and risk profile are both substantially similar to that of the fund. For thispurpose, the risk profile of another unregulated scheme will be treated assubstantially similar to that of the fund only if there is such similarity in relation toboth liquidity and volatility.

(b) Former shareholders/limited partners: The fund may be promoted to personswho, within the last 30 months, have been shareholders/limited partners in thefund (again this will not be relevant until after the end of the initial offer period) or


in another unregulated scheme whose underlying property and risk profile areboth substantially similar to that of the fund, as described in (a) above.

(c) Established customers of the investment manager: The fund may be promotedto established customers of the investment manager, being customers who havebeen and remain an actual customer in relation to investment business done withor through the investment manager, provided that reasonable steps have beentaken to ensure that an investment in the fund is suitable for such customers afterhaving sought information about their circumstances and investment objectives.

(d) Newly accepted customers: The fund may be promoted to newly acceptedcustomers of the investment manager, subject to the same proviso as in (c)above, and provided further that a written agreement exists between such personand the investment manager relating to investment business to be done betweenthem and such agreement was entered into without any breach of Section 76 ofthe FSA or any applicable conduct of business rules.

(e) Non-private customers of the investment manager: The fund may be promotedto non-private customers of the investment manager, being essentially personswho are not private customers, as well as persons who would otherwise beprivate customers but who are reasonably believed to have sufficient experienceand understanding to be treated, and who have given their written consent to betreated, as non-private customers.

It should be noted, however, that the investment manager may not send a copy of theprospectus/offering memorandum to the wider categories of person to whom, as an authorisedperson, it is permitted to market shares/limited partnership interests. It may only send theprospectus/offering memorandum to the same categories of person to whom it may be sent bythe fund/general partner, as an unauthorised person (as described above). The investmentmanager may, however, issue the prospectus/offering memorandum to the wider categories ofpersons by issuing it as its own document by appending it to a “UK wrapper” which complieswith the rules of its regulatory authority relating to the contents of investment advertisements.

Exceptions to the Restrictions on Cold Calls: Exceptions to the cold calling restrictionsdescribed above apply in relation to authorised persons.

The principal relevant exceptions in the Regulations are that an authorised person, such as theinvestment manager, may make unsolicited calls on existing customers and non-privateinvestors.

An existing customer of the investment manager for this purpose is a customer who has alegitimately established existing customer relationship with the investment manager or one of itsassociates, and the customer relationship is such that the customer envisages receivingunsolicited calls.

The exception for non-private investors would allow the investment manager to procure orendeavour to procure a person to purchase shares/limited partnership interests in the fund if thecall is made with a view to the investor purchasing shares/limited partnership interests as a non-private investor. However, the investment manager must be able to demonstrate that it believeson reasonable grounds at the time of the call that the exception is available. A non-privateinvestor for this purpose includes an individual (but only if he is acting in the course of carryingon investment business) and any company, partnership or trust.



Yes, since whether the marketing is carried out by an authorised person or by an unauthorisedperson, the shares/limited partnership interests may be marketed to persons who are authorisedunder the FSA which would include banks acting on a discretionary basis for their customers. Inneither case, however, would the banks be permitted to pass on the prospectus/offeringmemorandum to their customers.

Is there a numerical limit on the number of investors who may be approached, or mayinvest in the shares/limited partnership interests? Does this limit differ according to theperson who conducts the marketing?

No, except where the fund is a closed-ended investment company and reliance is placed on the“no more than 50 persons” exception to the POS Regulations.



(b) the fund/general partner or the investment manager’s representatives meetingwith potential investors in the United Kingdom;

(c) “road shows” or other group seminars/presentations in the United Kingdom;


a) This is dealt with under Exceptions to the Restrictions on Advertising.

b) Such meetings will be permissible so long as the fund/general partner or the investmentmanager can rely on the overseas person exemption if it is not authorised under theFSA (see above under Marketing by Unauthorised Persons) and, if the fund is closed-ended, no offer of shares to the public is made under the POS Regulations. If theinvestment manager is authorised under the FSA and the fund is open-ended, it maymeet with potential UK investors so long as they fall within the categories of person towhom the shares/limited partnership interests may be marketed under Section 76(2) ofthe FSA and under the Financial Services (Promotion of Unregulated Schemes)Regulations 1991 (see above under Marketing by an Authorised Person). If theinvestment manager is authorised under the FSA and the fund is closed-ended, it maymeet with potential investors in the UK so long as no offer of shares to the public ismade under the POS Regulations.

c) Such activities fall to be treated in the same way as meetings with potential investors inthe UK.

d) This is dealt with above under Exceptions to the Restrictions on Cold Calls.



Yes; however, Section 57 of the FSA and the Financial Services (Promotion of UnregulatedSchemes) Regulations 1991 restrict the persons to whom the prospectus/offering memorandummay be sent and do not distinguish between investors who have, or have not, solicited a copythereof.


No, obtaining such a listing is of no advantage in terms of the restrictions on marketing underSection 57 of the FSA or under the Financial Services (Promotion of Unregulated Schemes)Regulations 1991.

Can marketing which is conducted on a private placement basis rely on Englishlanguage documentation?

Yes.

Is a “negative clearance” route available by which the regulatory authorities will confirmthat, if conducted in a particular way, the marketing of shares/limited partnershipinterests will not infringe local marketing rules and regulations?

Yes, but in practice it is rarely used. It involves seeking “advice” (in effect a form of private letterruling) from the Financial Services Authority under Section 206 of the FSA. Such “advice”,whilst binding the Financial Services Authority, is not binding on the English courts.


If the fund is a collective investment scheme, the following legend should be included:

“The Fund is an unregulated collective investment scheme for the purposes of section 76of the Financial Services Act 1986 of the United Kingdom (the “Act”). This document hasnot been approved for the purposes of section 57 of the Act by a person authorisedunder the Act. Accordingly, this document may only be issued or passed on in theUnited Kingdom to a person who is of a kind described in Article 11(3) of the FinancialServices Act 1986 (Investment Advertisements) (Exemptions) Order 1996 or to a personto whom this document may otherwise be lawfully issued or passed on and it must notbe reproduced or distributed or passed on to any other persons.”

If the fund is a closed-ended investment company, the following legend should be included:

“The Shares may not be, and are not being, offered to persons in the United Kingdomand this document may not be distributed in the United Kingdom except to personswhose ordinary activities involve them in acquiring, holding, managing or disposing ofinvestments (as principal or agent) for the purposes of their businesses or otherwise incircumstances which have not resulted and will not result in an offer to the public in theUnited Kingdom within the meaning of the Public Offers of Securities Regulations 1995of the United Kingdom.


This document has not been approved for the purposes of section 57 of the FinancialServices Act 1986 of the United Kingdom (the "Act”) by a person authorised under theAct. Accordingly, this document may only be issued or passed on in the United Kingdomto a person who is of a kind described in Article 11(3) of the Financial Services Act 1986(Investment Advertisements) (Exemptions) Order 1996 or to a person to whom thisdocument may otherwise be lawfully issued or passed on and it must not be reproducedor distributed or passed on to any other persons”

29 October 1999 Simmons & Simmons

Alternative Investment Management Association (AIMA)Lower Ground Floor, 10 Stanhope Gate, Mayfair, London W1K 1AL

Tel +44 (0)207 659 9920 Fax +44 (0)207 659 9921E-mail – [email protected] Internet – http://www.aima.org


alternative investment management association (aima)

Economy & Finance