With the introduction of the new German Capital Investment Code (the "KAGB") all marketing activity or distribution of funds in Germany now requires registration with the German Federal Financial Supervisory Authority (the "BaFin").
The KAGB came into effect on 22 July 2013 and follows the implementation of the Alternative Investment Fund Managers Directive (the "AIFMD"). As a result, Irish funds must now asses their activities in Germany in order to determine if steps need to be taken to register with BaFin.
Exemptions from the Requirement to Register with the BaFin
In carrying out an analysis of their activities in Germany, Irish funds should take note that the following activities are subject to an exemption from the need to register with the BaFin:
- publication of a fund's name without any marketing taking place;
- reference or publication of a fund's net asset value or the redemption or offering price of shares or units of a fund on an organised market;
- issuance of marketing material relating to a fund already registered for distribution in Germany but which also contains information of sub-funds not registered in Germany. For this exemption to be available, those subfunds not registered for distribution in Germany must be clearly identifiable;
- reference or publication of the basis of taxation of a fund or the provision of additional information required under German law;
- publication of disclosures to investors in accordance with regulatory requirements;
- EU master UCITS issuing units of one or more German UCITS feeder funds.
Categories of Investors
The KAGB now provides for three difference categories of investors, namely (i) professional investors (this definition is identical to that included in the AIFMD), (ii) semi-professional investors, and (iii) retail investors. Semi-professional investors are a new category of investor and include:
- those investors subscribing a minimum of €200,000 and who provide a written declaration regarding their knowledge of the risk factors associated with an investment;
- investors subscribing for a minimum investment of €10,000,000; and
- those deemed to have a "professional qualification" i.e. directors and employees of an alternative investment fund manager ("AIFM") (in instances where such individuals are investing in an alternative investment fund ("AIF") for which the AIFM acts).
- Retail investors are those that do not fall within the definitions attributed to professional or semi-professional investors.
The type of registration process to be completed with BaFin will be determined by the category of investor that a particular fund is targeting (excluding UCITS which will continue to effect registration through the home state/regulator-to-regulator notification process).
Registration Process When Distributing to Professional or Semi-professional Investors
1. UCITS not registered for public distribution in Germany
Those UCITS that are currently distributing in Germany via private placement may continue to do so but are required to register with BaFin by 22 July 2014[1].
2. EU AIF managed by an EU AIFM and already registered for public distribution in Germany
The passporting regime provided for under the AIFMD is applicable here. To ensure the timely registration of such funds with the BaFin in advance of the 21 July 2014 deadline, Irish funds should file their application with the Central Bank of Ireland by the middle of June 2014 (at the latest).
3. EU AIF managed by an EU AIFM not currently registered for public distribution in Germany
This category of fund is allowed to continue its activities in accordance with the old regime until 21 July 2014. After this date, the AIFMD passporting regime described above applies.
4. AIF managed by non-EU AIFM not currently registered for distribution in Germany
Application for authorisation to distribute in Germany must be made directly with BaFin. Where an AIF intends to distribute shares/units to professional investors, BaFin has two months to review the application and notify the AIF of its decision. Applications must be submitted to BaFin by May 2014. BaFin's review period is extended to four months where distribution is also planned for semi-professional investors. Accordingly, AIFs targeting semi-professional investors must have their applications with BaFin by March 2014.
Specific review periods apply to feeder AIFs as follows:
- Distribution to professional investors: where the feeder AIF has a master AIF managed by an EU AIFM a three month review period applies. If the master AIF is managed by a non-EU AIFM a four month review period applies.
- Distribution to professional and semiprofessional investors: where the feeder AIF has a master AIF managed by an EU AIFM a five month review period applies. If the master AIF is managed by a non-EU AIFM an eight month review period applies. Registration of this category of AIFs with BaFin is the most complicated as a full review of non-EU AIFMs and the management of non-EU AIFs has to be carried out to determine if the provisions of the AIFMD are met. The specific requirements the BaFin willfocus on are contained in Article 42 of the AIFMD (this deals with marketing within the Member States without a passport).
5. Non-EU AIF managed by an EU AIFM currently registered for distribution in Germany
Under the provisions of the AIFMD, Germany has opted to allow non-EU AIFs to be distributed in its jurisdiction. Registration of such AIFs must be made directly with the BaFin. BaFin has a period of 30 working days in which to consider such applications and notify the EU AIFM. Feeder AIFs with EU AIFM are subject to a two month review period and those with non-EU AIFM face a review period of five months, in which case applications for their registration with BaFin had to be submitted by May 2013 and February 2013 respectively.
6. Non-EU AIF managed by an EU AIFM not currently registered for public distribution in Germany
This category of AIF must submit an application directly with BaFin by June 2014.
7. AIF managed by non-EU AIFM currently registered for public distribution in Germany
Applications for registration with BaFin for this category of AIF must be submitted by 21 July 2014. Non-public distribution can continue under the existing rules in place in Germany until that date.
8. AIF managed by EU AIFM falling under Article 3(2) of the AIFMD currently registered for public distribution in Germany
Article 3(2) of the AIFMD provides exemptions from some of its provisions for two types of AIFM.
The first type of AIFM to which the exemptions apply are those AIFMs that directly or indirectly, through a company to which the AIFM is linked by common management or control, or by a substantive direct or indirect holding, manage AIFs whose assets under management (including those assets acquired through the use of leverage) in total do not exceed a threshold of EUR100 million.
The second type are those AIFM that directly or indirectly, through a company to which the AIFM is linked by common management or control, or by a substantive direct or indirect holding, manage AIFs whose assets under management do not exceed a threshold of EUR 500 million when the portfolios of AIFs consist of AIFs that are unleveraged and have no redemption rights exercisable during a period of 5 years following the date of initial investment in each AIF.
Registration of these types of AIF with BaFin are not as complex as for other types of funds. Once an application has been filed (by 21 July 2014 at the latest) with BaFin the relevant AIF is free to proceed with its distribution. However, it is important to note that distribution to professional and semiprofessional investors is only permitted when the home state of the relevant AIFM allows distribution of an equivalent German AIF in its jurisdiction without imposing more onerous requirements on that German AIF.
9. AIF managed by EU AIFM falling under Article 3(2) of the AIFMD not currently registered for pubic distribution in Germany
Applications for registration for this type of fund must be with BaFin by 21 July 2014.
Registration Process for AIFs Targeting Retail Investors
The registration of AIFs intending to target retail investors involves a number of additional requirements. Where the AIF in question has an EU AIFM, a review period of three months applies. To ensure AIFs are registered with BaFin by the 21 July 2014 deadline, applications should be filed by April 2014. However, for those AIFs with non-EU AIFM, applications for registration must be with BaFin by January 2014 as a six month review period is available to BaFin.
Some of the additional requirements that must be met where an AIF is targeting retail investors include:
- All fund documentation must be translated into German;
- The AIF and the AIFM must have their registered offices in the same country;The competent authority supervising the AIF and the AIFM must be considered to be co-operative by BaFin;
- The AIFM and the management of the AIF must meet each of the requirements laid down in the AIFMD;
- Where a non-EU AIF and AIFM are seeking registration, an agreement between the third country of the AIF/AIFM must be in place with Germany so that double taxation of income and assets can be avoided;
- Similarly, if the AIF and AIFM are located outside the European Economic Area, arrangements must be in place between BaFin and the competent authority of the relevant jurisdiction.
- For those AIF that are not currently registered for public distribution, an application must be lodged directly with BaFin by May 2014.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
