The EU alternative investment fund managers directive (AIFMD) governs the distribution of private funds (alternative investment funds – AIFs) in the EU.
The AIFMD categorizes EU investors as professional investors (e.g., pension funds and insurance companies) and non-professional investors (e.g. high-net-worth individuals (HNWI) and certain smaller family offices). Such non-professional investors qualify for AIFMD purposes as retail investors.
Unregulated Luxembourg AIFs can be marketed to EU-based professional investors under an EU marketing passport, provided the AIF is managed by an EU authorized AIF manager. In order to protect EU retail investors against e.g. the illiquid nature and limited information obligations of Luxembourg unregulated AIFs, such AIFs cannot obtain passporting rights to target EU retail investors.
Although EU-based HNWI qualify as retail investors, they may "opt-up" as professional investors, meaning that the Luxembourg AIF can be marketed to them pursuant to the EU marketing passport, if they meet a suitability test.
The suitability test requires that at least two of the following conditions are met: (i) the HNWI has carried out significant and frequent previous transactions, (ii) the HNWI's portfolio of financial instruments (including cash) exceeds a value of EUR 500k and (iii) the HNWI has at least one year of relevant professional experience in the financial sector. In practice, the focus is usually on the second and third criteria.
EU retail investors who cannot or do not opt-up do not necessarily disqualify as marketing targets for unregulated Luxembourg AIFs. AIFMD allows EU Member States (EUMS) to accommodate such marketing on an EU country-per-EU country, but not on a passported basis. Most, but not all EUMS, have made use of this possibility. Those EUMS usually impose, among other requirements, a combination of minimum investment amount, minimum wealth, prior authorization of the Luxembourg AIF by the Luxembourg regulator, a knowledge test and/or supervision at AIF level. Marketing to retail investors that cannot or do not opt-up as professional investors comes with the need for additional detailed disclosures on the Luxembourg AIF that is offered. Non-EUMS usually also impose their own specific conditions to tap into their private wealth pools.
It should be well understood that US fund managers do not perceive the "opt-up" route as an efficient tool to access EU retail investors for their unregulated Luxembourg AIFs. Onboarding such retail capital may technically be possible, but is generally only used, at the very best, to accommodate a handful of retail investors that already have warm relations with the US Fund Manager. It is simply considered too labor intensive, administratively burdensome or risky from an AML/CFT or investor default perspective to onboard a substantial number of opt-up retail investors.
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.
