March 2009

LEGAL EASE: forging ahead with private placement

Private placement can offer a high degree of flexibility, although regimes differ dramatically across member states of the European Union. Jane Prior Nabarro comments...
Private placement enables the private sale of securities to a limited number of eligible investors, without triggering the supervisory and disclosure obligations that would apply if instruments were offered to a wider market. Typically, participation is reserved for appropriately qualified market participants. These are usually financial intermediaries, including placement agents, banks and investment funds or authorised financial institutions, including pension funds and insurance companies and in some cases high-net-worth individuals and corporate investors.

Private placement can offer a high degree of flexibility, although regimes differ dramatically across member states of the European Union.  At present, each member state has local laws permitting or exempting private placement and in many cases there is no formal regime. These widely differing approaches significantly complicate and confuse cross-border private placement and existing EU financial legislation does not address directly this issue.

In light of this, in April 2007, the European Commission requested that stakeholders comment on the functioning of private placement regimes throughout the European Union, to assist in determining whether significant barriers exist, resulting in single market failure and to consider options for reform. The 38 responses which were received confirmed that member states differ widely in the extent to which they allow financial institutions and qualified investors to transact privately. On 17 July 2008, the European Commission published a preliminary Impact Assessment Report (SEC (2008) 2341) and it is currently in the process of determining the best way forward.

Current barriers 
The Impact Assessment Report identifies the key obstacles to cross-border placement as the differing approaches across member states to:
  (a) requirements to produce local disclosure documents to accompany an offer;
  (b) restrictions on marketing and promoting an offer;
  (c) restrictions on eligible offerors or intermediaries approaching prospective investors;
  (d) defining eligible investors; and
  (e) requirements regarding prior approval or registration of instruments.

Generally, these barriers and impediments add transactional costs, generate significant legal uncertainty and may, in some cases, prevent transactions from occurring.

Specifically, from the perspective of a fund manager, these obstacles lead to increased costs in accessing markets and ensuring compliance with complex regulatory regimes. They also impinge upon the ability of a fund manager to market funds widely to achieve investor diversification and consequently hinder their ability to raise capital in certain markets. For investors, the choice of product is potentially reduced, leading to a less diversified investor base in commingled products and an increased cost base for the creation and marketing of products.

Currently, there are isolated provisions in the Prospectus Directive (2003/71/EC) and the Markets in Financial Instruments Directive (MiFID) (2004/39/EC) that are complementary to the standardisation of private placement. The Prospectus Directive provides exemptions to the need to publish a compliant prospectus, but this exemption does not apply to open-ended funds or certain close-ended funds. Further, it only provides an exemption in relation to disclosure obligations and does not offer relief from other requirements. While MiFiD provides for the categorisation of investors, it only specifies some exemptions from applicable conduct of business rules for particular types of investors. These exemptions are limited in their scope and operation with regard to private placement.

Alternatives being considered by the EU
The Impact Assessment Report details the options the European Commission is currently considering, in an attempt to overcome these obstacles and the likely impact of each option.

One of the options under consideration is the amendment of existing EU financial legislation, in particular the Prospectus Directive and MiFID, to establish a clearer understanding of a uniform private placement regime and to relieve offerors of disclosure requirements and conduct of business rules. However, legislation would still be found across two different sources, which may lead to issues in accessibility and interpretation.

An alternative option is non-coordinated action by the industry, so that offerors hindered from cross-border private placement on the basis of mutual recognition could be encouraged, on a case-by-case basis, to file complaints. Over time, case law could emerge which would be used to strike down disproportionate or illegal restrictions. This option would entail a lengthy process and the resulting case law may prove too specific (or even too wide) to apply to individual situations that arise in the future, leaving uncertainty in this area.

A further option under evaluation is for the Committee of European Securities Regulators or the European Commission to publish non-binding guidance documents to improve legal clarity, create a more level playing field and increase market efficiency. It is envisaged that member states would undertake to align definitions and regulatory frameworks according to best practice. As the option would be non-binding, it is unlikely to efficiently and effectively address current barriers.

In addition, the European Commission is considering the introduction of a new purpose built EU directive, which would take into account the existing legal framework and ensure that the two are consistent and comprehensive. This approach would be appealing to all involved, as it would result in codified legislation, which would be accessed using one source.

If the costs are likely to substantially outweigh the expected benefits, the European Commission may opt to do nothing in this area, although considering the current inconsistencies and confusion, this would be undesirable.

Regardless of which option the European Commission chooses to implement a new regime, the fundamental aim should surely be to provide sufficient clarity in relation to the boundaries of an EU private placement and specifically address the issues of eligible investors, products and providers and create a unified approach which overcomes the inconsistencies between member states that currently hinder cross-border private placement.

Fund managers will benefit from a new regime in a variety of ways; from reduced legal costs and legal liabilities, to quicker time to market. As a consequence of these benefits to fund managers, investors should in theory enjoy cost reductions and in addition, the envisaged lowering of trade barriers should trigger more cross-border offerings and provide investors with a wider choice of better and/or cheaper products by creating a competitive market.

It is worth noting that while a private placement regime may clarify current inconsistencies, differing tax rules across member states still remain a barrier to the creation of a true single market.

As the decision making process within the European Commission takes on average between 18-24 months, it is anticipated that the new regime will come into force in 2011 at the earliest.

• Jane Prior is an associate at Nabarro 

©2009 funds europe

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