The EU Commission has implemented the regulation regarding packaged retail and insurance-based investment products (the “PRIIPs”) which has become directly applicable in Finland as of 1 January 2018. Principally, the PRIIPs regulation imposes new obligations to parties marketing investment products offered to non-professional investors.
Investment products subject to the regulation generally include e.g. alternative investment funds (“AIFs”) (such as private equity and venture capital funds), the so-called UCITS-funds, various structured investment products and investment-linked life insurance products, whereas e.g. certain investment-linked pension insurance products are excluded. The purpose of the PRIIPs is to create a pre-defined standard for providing non-professional investors with information on various investment products.
It should be emphasised that the definition of “non-professional investor” is relatively broad, comprising also investors that many would generally regard as being professional and that are often a part of the target group of private equity funds and other closed-end AIFs (such as foundations, family offices, municipalities and university endowments, which in other contexts may more easily be classified as professional investors).
Effects on fundraising of AIFs
Generally, if a fund manager continues or starts marketing an AIF to non-professional investors after 1 January 2018, the manager of such AIF must provide to non-professional investors either a key information document (“KID”; in Finnish avaintietoasiakirja) in accordance with the PRIIPs or a key investor information document (“KIID”; in Finnish avaintietoesite) in accordance with the Finnish Act on Alternative Investment Fund Managers (as provided by the transitional provisions under the PRIIPs). The managers must follow the chosen option (between the KID and the KIID) consistently with respect to each AIFs (but may apparently have a KID prepared for one fund and a KIID for another).
Until 31 December 2017, Finnish managers marketing AIFs to non-professional investors have had a possibility to apply from the Finnish Financial Supervisory Authority (the “FIN-FSA”) an exemption from the obligation to prepare a KIID. Such exemptions are valid until 30 April 2018 when they are automatically revoked. (It can be noted the FIN-FSA has in many cases also granted the registered-only sub-threshold managers an exemption allowing them to market a fund to Finnish non-professional investors in the first place, and such exemptions should remain effective also after 30 April 2018.)
A KID or a KIID is not required if the AIF is not marketed to non-professional investors after 31 December 2017. Although not entirely clear, but if the manager has received the exemption from preparing a KIID, this should be understood so that a KID is either not required if marketing to non-professional investors is not continued after the expiry of the exemption.
Furthermore, the contents of the KID or the KIID shall be regularly (and at least annually) re-evaluated, and updated if necessary. The regulations do not explicitly state, and accordingly it is unclear whether the KID for a closed-end AIF would have to be updated also after the final closing of the AIF. As closed-end AIFs are not marketed after the final closing (and accordingly, investors may not invest additional amounts in or withdraw from the fund thereafter), requiring updates would seem to serve no purpose.
Key contents of a PRIIPs KID
The KID must be delivered to the FIN-FSA prior to the start of marketing activities and provided to the prospective investors and published on the webpage of the developer of the investment product. Contrary to the KID, a KIID is not required to be published on webpages. The content of a KID is relatively standardised and based directly on the PRIIPs, and must include qualified information under the following seven themes (and providing adequate information may require a number of calculations):
- What is the product (including type of product, its objectives and term);
- What are the risks and what the investor can get in return;
- What happens if the developer of the product is unable to pay out;
- What are the costs associated with the investment (including both direct and indirect costs to be borne by the investor);
- How long the investor shall hold the investment and can the investor take money out early;
- How the investor can make complaints about the investment product; and
- Other relevant information.
Breach of obligations under the PRIIPs may be severe (obligation to indemnify non-professional investors and a penalty payment amounting to higher of up to 3% of the annual turnover and EUR 5 million).
Borenius’ lawyers are available to assist in addressing any questions you may have regarding this legal alert. Please feel free to contact any of the Borenius’ attorneys listed in this alert or those with whom you usually work.