EN EN

EN

EN EN

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 17.7.2008 SEC(2008) 2340

COMMISSION STAFF WORKING DOCUMENT

IMPACT ASSESSMENT REPORT ON PRIVATE PLACEMENT

{SEC(2008) 2341}

EN 2 EN

COMMISSION STAFF WORKING DOCUMENT

IMPACT ASSESSMENT REPORT ON PRIVATE PLACEMENT

Lead DG: DG Internal Market and Services

Other involved services: -

Agenda planning or WP reference: Communication on private placement; Non Legislative Acts; 2007/MARKT/036

EN 3 EN

TABLE OF CONTENTS

1. Procedural issues and consultation of interested parties .............................................. 9

1.1. Organisation and timing............................................................................................... 9

1.2. Consultation and expertise ......................................................................................... 11

1.3. Impact Assessment Board .......................................................................................... 11

2. Problem definition...................................................................................................... 12

2.1. Barriers to cross-border private placement arising from national provisions ............ 12

2.2. Limited impact and relevance of existing EU level provisions ................................. 14

2.3. Consequences for market participants ....................................................................... 15

2.4. Impacts on the financial system/wider economy ....................................................... 17

2.5. Subsidiarity and proportionality................................................................................. 19

2.6. Summary of problem description............................................................................... 21

3. Objectives................................................................................................................... 22

3.1. Legal certainty, transparency, and enforceability ...................................................... 22

3.2. Comprehensive framework which addresses all the main regulatory barriers to mutually beneficial cross-border private placements................................................. 23

3.3. Avoiding onward sale of privately placed investments to the retail market .............. 24

3.4. Coherent articulation with existing EU financial services legislation and national regimes ....................................................................................................................... 24

4. Policy options............................................................................................................. 25

4.1. Options for framing and scoping EU arrangements:.................................................. 25

4.1.1. Eligible investors........................................................................................................ 26

4.1.2. Eligible providers/intermediaries ............................................................................... 28

4.1.3. Product coverage........................................................................................................ 29

4.2. Options for implementation ....................................................................................... 31

5. Analysis of impacts .................................................................................................... 32

5.1. Options on 'scoping and framing'............................................................................... 32

5.1.1. 'Do nothing' ................................................................................................................ 32

5.1.2. Eligible investors........................................................................................................ 33

5.1.3. Eligible offerors ......................................................................................................... 35

EN 4 EN

5.1.4. Eligible products ........................................................................................................ 37

5.2. Options for implementation ....................................................................................... 40

5.2.1. 'Do nothing' ................................................................................................................ 41

5.2.2. Case-by-case approach............................................................................................... 41

5.2.3. Non-legislative action via CESR/Commission .......................................................... 42

5.2.4. Amendments to existing EU law................................................................................ 43

5.2.5. New purpose-built EU Directive................................................................................ 43

6. Comparing the options ............................................................................................... 44

7. Monitoring and evaluation ......................................................................................... 46

Annex I: Glossary/Acronyms................................................................................................... 47

Annex II: Elements of private placement regimes besides Prospectus Directive .................... 48

Annex III: Qualified Investor vs Professional Client vs Eligible counterparty ....................... 52

Annex IV: Scope of the Prospectus Directive and MiFID....................................................... 54

EN 5 EN

EXECUTIVE SUMMARY

What is private placement?

Private placement is an officially recognised distribution method through which designated market participants can buy and sell financial instruments to each other without having to comply with rules that would usually apply when the same instruments are offered to the public/retail investors. It provides participants with a flexible cost-effective tool to sell and buy tailor-made financial instruments. Participation in private placements is usually reserved to appropriately qualified market participants; typically these are authorised financial intermediaries, including placement agents, banks or investment funds/firms, pension funds, life insurance companies, in some cases also high net wealth individuals and corporate investors.

Private placement is particularly suitable for the distribution and marketing of investment propositions which may be considered less suitable for wider public offer. This could include distribution of new types of investment strategy, such as single hedge funds, private equity funds or some commodity funds, whose risk-reward profile may make them less appropriate for retail investors.

Problems and objectives

Within Europe, Member States have developed different arrangements to support private placement between local buy-side and sell-side participants. Differences between national private placement regimes mean that it is often not possible to extend private offerings across EU Member States without adjusting the marketing material or even the offer itself. Offerors also have to be careful in determining the potential investors they can approach. This legal uncertainty is aggravated by frequent changes to national rules and conditions as reported. Offerors therefore have to bear substantial costs in order to identify and comply with the relevant rules. These may lead to self-imposed restrictions on the Member States where investments are privately placed. This means lost business opportunities for placement intermediaries. It restricts investment choices or increases costs for potential qualified investors in other Member States. Investors may be deprived of important portfolio diversification opportunities. Financial markets in smaller Member States might suffer from reduced liquidity in relevant financial instruments.

Problems with cross-border private placements result primarily from inconsistencies between and insufficient transparency of, national regimes with respect to the boundaries of the regime: Who can participate? Which products can be placed? Which rules have still to be complied with? These shortcomings prevent potential participants from profiting from the benefits of private placement, with the adverse consequences for financial markets and the wider economy as described above. An EU private placement regime1 should help to overcome these problems.

1 The term 'EU private placement regime' is used in a very broad sense here. A regime does not

necessarily have to be a legal framework but could as well consist of a common understanding of the concept only.

EN 6 EN

Options and assessment

Options for developing such a regime feature in the substance or coverage of such a regime and the appropriate instrument or technique to be used to give effect to it. The former set of options focuses on the eligibility of investors, offerors and products. The latter includes both legislative and non-legislative forms at industry, national and EU level.

The analysis of the potential impacts of the options has revealed that, at this stage, there are not sufficient available data and information to come to a substantiated assessment and recommendation of the best way forward. Instead, the impact assessment work should be continued, with this report serving as a stocktaking and information document for all stakeholders and interested partners.

EN 7 EN

INTRODUCTION TO PRIVATE PLACEMENT:

What is private placement?

Private placement is an officially recognised distribution method through which designated market participants can buy and sell financial instruments to each other without having to comply with rules that would usually apply when the same instruments are offered to the public/retail investors. 'Private placement' starts from the premise that seasoned market professionals can arrange investment transactions between themselves without needing the benefit of regulatory protections designed for retail investors. Instead, these participants can rely on private contract law to resolve any disputes that arise. The regulatory safeguards for retail investor protection that would be waived in 'private placement' would include mandatory disclosure requirements; procedures for product registration or approval by supervisory authorities; promotion, distribution and marketing; and conduct of business rules.

Participation in private placements is usually reserved for appropriately qualified market participants. On the sell-side these are usually authorised financial intermediaries, including placement agents, banks or investment funds/firms. Eligible buy-side entities usually comprise authorised financial institutions, including pension funds, life insurance companies – but may also involve high net worth individuals and some corporate investors.2

Private placement rules clarify the dividing line between public and private offers. This ensures that market participants have clarity and confidence in the regulatory status of the transactions into which they enter.

What benefits can private placement bring to the economy?

In principle, any investment proposition could be traded through a private placement regime. Private placement can be used to buy/sell interests in individual companies. Because private placement avoids the regulatory and administrative costs associated with public offer, it is an attractive route for (small) companies seeking to raise (venture) capital.

Private placement is also particularly suitable for the distribution and marketing of investment propositions which may be considered less suitable for wider public offer. This could include distribution of new types of investment strategy such as single hedge funds, private equity funds or some commodity funds whose risk-reward profile may make them less appropriate for retail investors. By clearly defining ex ante the population of expert investors who can be approached with a view to private placement of such instruments, a private placement regime can create a legally secure environment – a “safe harbour” – in which those instruments are traded without exposing retail investors to investment risks which they do not have the means to absorb.

However, private placement can also be used to place financial instruments including all types of transferable security, derivative or collective investment (including interests in venture capital and private equity funds).

Private placement allows companies:

2 A glossary of the relevant terminology can be found in Annex I.

EN 8 EN

i. to maintain a higher level of privacy over their financing arrangements. For companies this can be more advantageous than publicly scrutinised offerings – confidential information is kept within a limited number of investors.

ii. to achieve a higher degree of flexibility and certainty in the amount of financing, with combinations of debt, equity, or debt and equity securities;

iii. to diversify capital structures away from public investors (in the case of listed company private placements); and

iv. to raise finance more cheaply than by selling stock to the public as an initial public offering (IPO) or accepting finance from venture capitalists.

Private placement allows fund managers:

i. to market their products flexibly and quickly and

ii. to negotiate terms with investors to ensure that investments are tailored to meet the requirements of a specific group of investors.

Private placement allows investors:

i. to access the products that can best meet their particular investment requirements and objectives;

ii. to obtain a stake in a company which they would not be able to achieve at an initial public offering;

iii. to make decisions on asset allocation on a more strategic level across the EU rather than requiring a number of separate strategies according to which jurisdiction they are in.

Private placement is a well-established distribution channel for qualified investors and providers throughout all major financial markets around the world (including the United States, Japan, Australia, Hong Kong, Singapore and Switzerland, as well as many EU Member States). The US Private Placement Review reports the value of US private placement at $543bn in 2006 (up from $338bn in 2005). There are no equivalent data on the volume of business placed on a private basis in the main European jurisdictions.

What is the single market dimension of this issue?

Within Europe, Member States have developed different arrangements to support private placement between local buy-side and sell-side participants. Differences between national private placement regimes mean that it is often not possible to extend private offerings across EU Member States without adjusting the marketing material or even the offer itself. Furthermore, offerors have to be careful when determining which potential investors they can approach.

The extensive differences between national approaches to this issue and the opacity of national arrangements make it very difficult for potential offerors to establish whether, or under what conditions, they can approach prospective investors in other Member States. If an offeror intends to privately place an investment product in several Member States at the same

EN 9 EN

time, these problems multiply. This legal uncertainty is aggravated by frequent changes to national rules and conditions as reported.

Prevailing differences between national private placement regimes and a lack of transparency significantly impede the use of this potentially important distribution channel in a cross-border context. Offerors have to bear substantial costs to find out about and comply with the relevant rules. These may lead to self-imposed restrictions on the Member States where investments are privately placed. This means lost business opportunities for placement intermediaries. It restricts investment choices or increases costs for potential qualified investors in other Member States. Investors may be deprived of important opportunities to diversify their portfolios. Financial markets in smaller Member States might suffer from reduced liquidity in the relevant financial instruments.

1. PROCEDURAL ISSUES AND CONSULTATION OF INTERESTED PARTIES

Preparatory work for this impact assessment started in spring 2007 with a call for evidence which was very broad in scope so as not to predetermine any outcome. Over time, the scope and the relevant issues became clearer and the work more focused. Discussions always involved all interested sections of the industry as well as supervisors.

1.1. Organisation and timing

Background

In its feedback to the Commission Green Paper on Asset Management in 2005, the investment fund industry expressed the view that there was no EU-level private placement regime for non-UCITS funds, which are generally regarded as more suitable for institutional and other sophisticated investors3 who are capable of self-directed investment decisions. Examples include private equity funds, including venture capital funds, and much hedge fund investing. These investment products may be products embodying specific forms of risk (for instance, difficulties in asset valuation). The Commission took note of this view and concluded in its White Paper on Asset Management (COM(2006) 686) of November 2006 that the issue warranted closer scrutiny.

The White Paper announced that the Commission services, working with the Committee of European Securities Regulators (CESR)4 and national authorities, would review national rules governing placement of financial instruments including certain funds with qualified investors, and carry out an initial assessment of options for building a common European private placement regime. To this end, it would study the types of marketing and sales restrictions that should be repealed in favour of reliance on the investment firms exercising responsibility for the sale of products on a client-by-client basis. As part of this process, the Commission and CESR would undertake a systematic inventory and analysis of national barriers to 'private

3 There are no commonly agreed definitions of these and most other terms used in this report.

Institutional investors are legal entities (banks, insurance companies, pension and investment funds, companies) investing in funds or other securities in contrast to individual investors who are physical persons/families. Sophisticated investors are investors who have sufficient knowledge and experience with investing to evaluate the merits and risks of an investment. A qualified investor is an investor that meets certain requirements established in the respective jurisdiction.

4 Acronyms and technical terms are explained in a glossary in Annex I to this report.

EN 10 EN

placement' of financial instruments with institutional investors and other eligible counterparties. The Commission would report to Council and Parliament on the steps that need to be taken to give full effect to a common private placement regime.

Organisation and timing of impact assessment work

The formal decision to prepare a proportionate impact assessment report was taken in December 2007. This impact assessment analysis draws on consultations and preparatory work which had been launched previously. This included a call for evidence which sought to gather input and evidence to inform the impact assessment analysis, in the form of problem description, objectives, options and preliminary assessment.

An extensive consultation process began in spring 2007 and is still continuing: National supervisors and regulators were consulted via the European Securities Committee (ESC) and CESR in April 2007. Member States were invited to describe and assess their national regimes. Wide and transparent public consultation with all stakeholders and market players might be affected took place informally at bilateral level and formally in an open hearing in April 2007, through presentations at conferences and two workshops with industry and supervisors in January and February 2008 (see below).

Given the relatively unsupervised and unreported nature of private placement it is not possible to gather evidence from official (data) sources. Therefore, besides the call for evidence, the workshops are seen as a major input into the analysis. They bring together the buy-side and the sell-side of private placements, as well as experienced legal advisors and national supervisors to discuss the costs and benefits of a potential EU private placement regime, the components of such a regime and the instruments to implement it.

A steering group5 for the impact assessment was set up in January 2008. Some of its members had already followed related work in the field of asset management by participating in steering groups for studies or in the impact assessment for the White Paper.

Table 1: Preparatory steps

Major steps / inputs Timing

White Paper on Investment Funds November 2006

ESME February/September 2007; March 2008

Call for evidence April-June 2007

Questionnaire on national regimes to CESR April-July 2007

ESC presentation/discussion May 2007

Open hearing 26 April 2007

Workshops January/February 2008

Presentation of IA report to the IAB April 2008

IAB opinion May 2008

5 DG's and services participating: Secretariat General, DG Competition, Economic and Financial Affairs,

Enterprise and Industry, Health and Consumer Protection, Taxation and Customs Union. The Steering Group met only once to establish itself. From there on it worked via email or through discussions at the fringe of other meetings with a similar composition, e.g. steering groups for related studies or IA work.

EN 11 EN

1.2. Consultation and expertise

As mentioned in the previous subsection, DG Internal Market and Services launched a call for evidence6 in April 2007 with a deadline for contribution at the end of June 2007. Forty responses were received. This call had been published on the Commission website. It had been announced in a press release and stakeholders' attention had also been drawn to this subject in an open hearing7 on 26 April 2007, where private placement had been discussed in one of the sessions with more than 100 stakeholders present. As the amendments to the UCITS Directive were the main subject of the hearing, it provided retail investors and their associations with a good opportunity to get involved in the discussion. However, no particular interest or concern in the subject was voiced by these groups. Summary reports on both events can be found under the respective links.

The Commission presented the call for evidence to the ESC in May 2007. The European Securities Markets Expert Group (ESME) discussed the issue of private placement in February and September 2007 and March 2008.

Furthermore, DG Internal Market and Services launched a questionnaire aimed at national supervisors together with a public call for evidence in spring 2007. This provided an initial more detailed overview of the current situation. Data are scarce due to the private nature of the deals; open discussions with all interested stakeholders are more effective in collecting information. Further evidence has been gathered in two workshops in January and February 2008 which brought together offerors, investors and supervisors/regulators to assess the status quo, possible ways forward and their likely impacts.

The consultation process has been open and transparent. The call for evidence has been published on the Commission website and announced in a press release. The individual replies (to the extent that respondents agreed) and a summary document were published in October 2007 on the Commission website as announced in a press release. The open hearing had also been announced via the Commission website. The two workshops were organised on an ad-hoc basis to complete the analysis and reflections. Here the selection process was guided by the need to have all relevant stakeholder groups represented, including public authorities and institutional investors. Participants were selected from those who replied to the call for evidence or had demonstrated a major interest in the subject in other ways.

1.3. Impact Assessment Board

The draft impact assessment report was sent for evaluation by the Commission's impact assessment board (IAB) on 14 April 2008. The IAB sent its comments on 16 May 2008. This revised impact assessment report takes these comments into account to the extent possible:

• The potential impact of a pan-EU private placement regime on the portfolios of institutional investors and the context of current financial crisis are addressed in sections 2.4 and 5.1.2.

• Current national practices are presented as examples in section 2.3. and in Annex II. The compatibility with Articles 56-58 TEC is discussed in 5.1.3.

6 http://ec.europa.eu/internal_market/investment/consultations/index_en.htm#call 7 http://ec.europa.eu/internal_market/investment/consultations/index_en.htm#hearing

EN 12 EN

• The need for further research and the associated timeframe are illustrated in section 6.

• Minor comments by the IAB have been addressed at various points in the report.

2. PROBLEM DEFINITION

This section describes the economic importance and the legal context in which private placement currently takes place in the EU. Using this stocktaking as a starting point, it analyses the precise nature and the extent of the problems in the EU arising from this lack of clarity over the meaning of private placement, especially in a cross-border context. It lists which problems are reported as representing the most significant barriers to EU cross-border investments.

2.1. Barriers to cross-border private placement arising from national provisions

This impact assessment is concerned primarily with the difficulties that arise for cross-border transactions between seasoned market professionals because of the lack of a common EU-wide understanding of private placement. These difficulties have their origin in divergent national approaches to private placement, or to the absence of relevant national provisions in some cases. The difficulties of organising private placement under these circumstances are compounded by a lack of transparency and frequent changes in the relevant national provisions.

According to Member States' responses to a Commission/CESR questionnaire on national private placement regimes, no Member State has introduced a distinct set of provisions defining private placement and the conditions under which investments can be privately placed. Instead, national arrangements on private placement take the form of a series of exemptions from individual legislative provisions spread over a range of fields.

An analysis by the Commission services of Member State responses to this questionnaire reveals significant differences between the various national arrangements. These differences extend to the basic conception and design of the national private placement arrangements, including:

– The scope of instruments or investments covered: While some Member States restrict coverage to securities and some (closed-end) funds, others are more 'liberal' in providing a private placement safe harbour for a wider universe of financial instruments.

– The regulatory provisions that are disapplied: Some national regimes only remove the requirement to provide a prospectus, but do not switch off other requirements that would apply in the case of a public offering. Others also waive additional investor protection requirements, such as rules on the conduct of business rules or product approval.

– The definition of investors and placing entities that are entitled to participate in private placement deals.

These differences may translate into the following complications for cross-border private placement:

EN 13 EN

– requirements to produce local disclosure documents to accompany the offer;

– restrictions on placing entities approaching prospective investors ('reverse enquiry')8

– requirements regarding prior approval or registration by supervisors of instruments before they are presented by the offeror to prospective expert investors;

– restrictions on marketing, promotion, etc.

– different approaches to defining the population of eligible investors

– limits on the eligible offerors or intermediaries who are permitted to approach prospective investors.

In some cases, these regulatory inconsistencies may preclude cross-border private placement. In other cases, the offeror may have to bear a high administrative burden and/or may be severely restricted in the types of deal that can be privately placed.

The fact that private placement is not properly codified at national level results in a lack of transparency which, in itself, can be an obstacle to cross-border private placement. (Potential) offerors are required to undertake or to commission legal surveys and provide for due diligence of the private placement regimes of all Member States targeted for private placements. The costs of legal surveys multiply with the number of Member States to be covered because Member States take different approaches to determining the provisions and scope of private placements. The lack of transparency may discourage some smaller domestic and foreign providers from using this distribution channel.

However, market participants report that, in a significant number of cases, the legal advice obtained is not conclusive. It has been reported that reputable and experienced legal advisors can came to opposite conclusions regarding the legitimacy of a private placement in a specific Member State. In such cases, offerors usually refrain from addressing the respective jurisdiction, despite having invested in legal advice.

According to one survey of the private placement requirements in 16 Member States, it is impossible for a MiFID-licensed investment firm to privately place a non-harmonised fund in three of the 16 Member States surveyed. In three other Member States it reported that private placement was only possible subject to requirements that are relatively difficult to meet.

The legal survey which informed this opinion cost the investment firm in excess of €600,000 to complete and needs updating every two years. Two other estimates of costs were undertaken by different investment firms involved in collecting legal advice on whether private placement of certain products is possible (received in the consultation process). The relevant costs are €10,000 per Member State and €300,000 to €450,000 for the whole EU.

8 Negotiations have to be initiated by the investor. The offeror is not allowed to establish the first contact.

This is seen as a typical example of a severe barrier to cross-border private placement as it is hard to prove ex-post.

EN 14 EN

2.2. Limited impact and relevance of existing EU level provisions

Until now, EU financial legislation has not attempted to introduce a coherent set of provisions to facilitate cross-border private placement. Existing EU financial legislation focuses on the regulatory conditions that must be applied when instruments are offered to the public, or placed on the public market. There is therefore a legal vacuum at EU level when it comes to private placements.

However, EU financial legislation does contain isolated provisions that are relevant – either because they switch off certain regulatory requirements when securities are not offered to the public, or because they contain references which may be relevant when considering the parameters of an eventual EU private placement regime. The two most relevant Directives are the Prospectus Directive and MiFID:

• The Prospectus Directive specifies the conditions under which an offer of securities can be exempted from the obligation to publish a prospectus compliant with the Directive. These exemptions mainly fall into two categories: those which are capable of being complied with mechanically (for example, imposing a €50,000 minimum on denomination) and those which in practice impose behavioural limits on the issuer or offeror (for example, where the exemption is conditional on offers being made to or directed at particular persons, e.g. "qualified investors").

• MiFID introduces a client classification regime, distinguishing between three types of "client": eligible counterparties, professional clients and retail clients. The level of investor protection granted under MiFID rules (and in particular, MiFID conduct of business rules, including rules on best execution and handling of client orders) differs according to the category in which an investor is classified.9

These isolated provisions do not constitute a comprehensive private placement regime because of several shortcomings. First, they provide insufficient and inconsistent product coverage: The Prospectus Directive does not apply to open-ended funds and to certain categories of closed-end investment vehicles; it only provides an exemption from disclosure obligations. MiFID also does not apply to certain actors in the market which may play a role in private placement (e.g. management companies of funds when exercising their collective management activity) and for those entities covered by it, it only offers a possible waiver from conduct of business rules.10 These shortcomings are easily explained by the fact that neither of the two directives has been designed specifically to provide an EU private placement regime.

Nevertheless, the existence of these different provisions does have a material bearing on discussion of the shape and scope of an EU private placement regime. In particular, the exemptions provided for under the Prospectus Directive for securities and closed end funds, are seen by some market participants as providing an operational basis for cross-border offer of those instruments –unencumbered by the application of (certain) irrelevant and burdensome forms of retail investor protection. To the extent that this perception is borne out, it leads some commentators to argue that steps to create private placement arrangements at EU level

9 See attached table in Annex III for a comparison between the relevant definitions of "qualified

investor", "professional client" and "eligible counterparty". 10 See table attached in Annex IV comparing the scope of Prospectus Directive and MiFID.

EN 15 EN

should concentrate on instruments which cannot benefit from the exemptions laid down in the Prospectus Directive – in particular open-ended investment funds (both harmonised and non-harmonised) and other collective investments excluded from the scope of the Prospectus Directive.

However, it is crucial to emphasise that this conclusion is based on a perception of the functioning of the Prospectus Directive which is not necessarily borne out empirically. As explained above, the purpose of the Prospectus Directive exemptions is to clarify the conditions under which securities can be offered cross-border without being required to produce a public offer Prospectus. DG MARKT is currently conducting a review of the Prospectus Directive which will help to evaluate whether the Prospectus Directive as implemented by Member States facilitates the cross-border offer of securities and closed end-funds to the extent that some market participants believe.

2.3. Consequences for market participants

The reported lack of legal certainty and the inconsistencies in national approaches to private placement and gaps in the scope of EU laws support the claim that there is a regulatory failure of the single market for certain categories of investments. It is striking that market practitioners report that it can often be easier to distribute investment products outside the EU than between Member States.

On the basis of this, the following consequences have been identified for the main category of actor.

Sell-side:

Sell-side entities (investment banks, placing agents, private equity managers and other authorised financial intermediaries) are usually the pro-active party in initiating approaches to prospective investors and are the ones most immediately confronted with problems associated with cross-border private placement. They incur much of the cost and legal risk associated with these transactions. They have been most vocal in raising concerns and specifying the difficulties that they encounter.

The placing entities are faced with problems of legal uncertainty and legal risk for some transactions entered into, extra costs associated with certain deals arising from the need to comply with certain local limitations on the way in which placements can be structured and offered, and in some cases insurmountable obstacles to cross-border placement.

- Costs of legal uncertainty and risk:

The level of legal certainty achieved by offerors is directly dependent on their ability to understand, interpret and take legal advice on the application of these local exemptions. The directors responsible for each offer bear the responsibility for ensuring that all relevant rules are observed.

Offerors face the costs of obtaining legal advice before they approach prospective investors in another Member State. It is important to note that these costs do not guarantee revenue. The legal analysis might reveal that private placement is not possible or only under conditions that are not regarded as acceptable. Alternatively, there might only be a small investment and the profit from it would not cover the costs of the legal advice. Smaller providers, especially, might not have the financial resources needed to cover such losses, or providers might

EN 16 EN

consider the prospects too vague and therefore decide not to engage in a legal survey in the first place, but to restrict the placement to the home Member State or a very limited number of Member States. It might also happen that providers decide not to go ahead with a placement in a targeted market because of the legal risk that would remain if the legal advice was not 100% conclusive.

Higher costs take the form of higher fees relating to work undertaken by in-house legal and compliance departments, or paid to third party advisors. There are also hidden costs in the form of extensive management resources and the time which is spent on unnecessarily complex capital raisings within the EU. This management focus detracts from the core business of managing investments and adds no additional value to investors.

- Barriers to market access and missed opportunities:

Local requirements or administrative procedures may have a more insidious impact by complicating or preventing cross-border transactions. Additional costs occur when the placement actually materialises and the offeror has to comply with national requirements such as product registration or notification, provision of disclosure documents, etc. Particularly problematic for sell-side entities are the national requirements, enforced in several Member States, for prior authorisation and registration of financial instruments and collective investment schemes. In evaluating whether or not to register an instrument for marketing in that Member State, the relevant authorities often use the conditions for wider public marketing as a benchmark. As many private offers, by definition, are designed for sale to a restricted and specialised investor base, these conditions cannot be fulfilled without restructuring the offer or generating extensive/expensive disclosure documents. Such formalities may effectively make it impossible to place products on a private basis in those markets.

The tables attached in Annex II attempt to depict the patchwork that exists at EU level in terms of national provisions governing the possibility for private placement of instruments in the different Member State markets.

This shows that Member States differ greatly as regards the extent to which they formally recognise the possibility for private placement between market participants, and the conditions under which such placement is possible. In many cases, the situation is further blurred by the absence of general enabling provisions for private placement. What is provided instead is a set of exemptions which may apply on a piecemeal basis to specific instruments.

Lost business opportunities may translate into reduced economies of scale – particularly through the inability to effectively exploit established distribution networks - and higher operating costs for sell-side institutions. Entities placing non-harmonised investment funds come up against particular problems, as they are the ones who have most difficulty in placing privately across borders or to using other distribution channels.

Investors/Buy-side:

Depending on the level of competition, offerors might be able to pass on (some of) the artificially higher transaction costs to investors in the form of higher placement fees. This would reduce the attractiveness of and returns from private placement for qualified investors.

EN 17 EN

More important, however, is the fact that investors' choice of investment propositions and their potential for portfolio diversification are significantly restricted in smaller markets due to the barriers and obstacles described. Qualified investors in the EU should be in a better position to diversify investment risks, allowing them to better adapt their investments to their needs/preferences. Qualified investors should also enjoy a more homogeneous level of protection all over the EU, while retail investors should not be exposed to these offers but would continue to benefit from proper investor protection for retail products like UCITS. The increased competition among non-UCITS collective investment schemes should also benefit qualified investors. This competition should translate into lowered costs and/or higher performances.

In agreeing to participate in transactions on a private placement basis, investors agree to forego the additional security that they might enjoy under statutory rules, and the enforcement of those rules by competent authorities. Many investors – including experienced investors – are comfortable operating under these statutory rules, particularly when presented with complex or innovative investment propositions. Therefore, it should not be assumed that all eligible buy-side institutions would be willing to trade systematically on a private placement basis. Recognition as a potential eligible buy-side entity should not therefore deprive investors from electing to trade, subject to statutory investor protection and disclosure provisions.

Businesses, enterprises:

Improved access to finance, in particular from private equity and venture capital funds could - by investing across borders and operating over a wider geographical area – find the most deserving investees and thereby achieve critical mass, specialise and more efficiently allocate capital. In other words, with an increased volume of alternative and equity funding, businesses should be able to finance their internal growth or expansion more easily and become more competitive.

This general restriction of market liquidity, and the limited fund-raising prospects for venture capital funds in particular, can have an adverse impact on the financing of small and medium-sized companies and of innovation.

Authorities:

National supervisors have to make comprehensive assessments of foreign product placement agencies which intend to privately place in their jurisdiction. Often the requirements that currently apply will not be met and the potential offeror might be reluctant to change them. In these cases, all costs incurred by both offeror and supervisor are sunk costs.

Agreeing a common approach would require significant investment on the part of the authorities. However, most of the effort will be of a "one-off" nature and should largely be compensated over time by the gains brought about by the opening of EU-wide business opportunities for these collective investment schemes. As in other areas, increased cross-border business would mean that supervisors have to coordinate across borders. However, this process is already underway and being steered by CESR.

2.4. Impacts on the financial system/wider economy

The static, transactional costs are compounded by dynamic costs and missed trading or investment opportunities. Opportunity costs may be borne by investors in smaller markets as

EN 18 EN

there might be no alternatives available in these markets. The fact that there are few if any investment propositions from abroad could also have negative impacts on market liquidity and market functioning. The preceding sections provide some indications of the transactional costs and complexity associated with trying to organise cross-border placement in the current environment.

Regarding potential market risks resulting from private placement, it has to be borne in mind that private placement does not create new products. Therefore it does not – of itself - create new risks. Risks in financial markets are not due to the use of a particular distribution channel, they usually lie in the investors' portfolios. Obviously these risks are independent of the manner in which an asset has been purchased. Furthermore, because private placement does not change any existing regulatory or fiduciary obligations of institutional investors, it does not alter the range of products in which they are allowed to invest either. Any neglect of such obligations is, once again, independent of the distribution channel chosen. Hence, there is no reason to expect that the introduction of (cross-border) private placement would lead to a marked overall increase in exposure to a particular asset class or investment strategy.

In those countries that have restricted institutional investor exposure to, for example, private equity or alternative investments, there may be some portfolio rebalancing to be done in order to take advantage of diversification opportunities offered by these asset classes. However, one should not expect this re-balancing to be on a particularly large scale. Evidence from those countries with a tradition of enabling institutional investors to exercise free portfolio investment decisions suggests that pension funds and insurance companies have managed their exposure to, for example, alternative investments prudently and have kept exposure to these asset classes below 2% of portfolio.

The recent financial turmoil has demonstrated that due diligence and fiduciary obligations may not be foolproof in the context of euphoric markets. Institutional investors and financial institutions invested in structured credit instruments and some asset-backed securities, which proved to be illiquid and hard to value in the difficult trading conditions that have persisted since last August. These developments have raised questions about the extent to which financial institutions and institutional investors exercised due diligence thoroughly and effectively when investing in these instruments. However, with few exceptions, exposure to these asset classes did not involve significant portfolio allocations. According to the IMF (2007), European institutional investors (pension funds, life insurance companies) are not thought to have invested a significant proportion of portfolio in structured credit instruments.

On the other hand, positive effects on the structure of investment portfolios of institutional investors might also be expected, as these are likely to gain better access to tailor-made propositions which they can use to balance their portfolios.

For these reasons, mandatory disclosure or conduct of business rules (which would be disapplied in the case of privately placed transactions) do not seem to be critical in ensuring that institutional investors manage portfolios appropriately (diversification, matching of liabilities and assets etc). The removal of such rules subject to strict conditions is not expected to have any related adverse impact on financial stability.

The consultations and impact assessment work undertaken so far by the Commission has not generated any aggregate estimates of the direct costs for different categories of actors, of missed opportunities, or of the wider implications for the EU financial system and economy. Despite extensive desk research into the functioning of established national private placement

EN 19 EN

regimes within and outside Europe, The Commission is not aware of any studies of the impact of private placement on the overall financial system.

This may be due to the bilateral nature of many private placement transactions and to the fact that such transactions are not necessarily identified as private placement transactions for supervisory or statistical purposes. This makes it difficult to arrive at orders of magnitude for the volumes of transaction flow that might potentially benefit from effective EU private placement regime.

In order to provide some empirical context for the discussion, Commission services have tried to compute some "back-of-the-envelope" estimates of the potential trade in collective investments (both harmonised and non-harmonised funds) that could potentially make use of cross-border private placement channels.

EFAMA estimate that about 60% (€6,153bn) of the UCITS funds in European ownership are held by non-retail investors. Based on the information available it is not possible to determine what share of this market that would actually be eligible to a potential EU private placement regime is of a cross-border nature and is traded among investors. However, it is estimated that about 20% of UCITS funds are of a truly cross-border nature. On the basis of this calculation, the current market potential would be almost €740bn for UCITS funds.

EFAMA report that a further €1,720bn in assets is managed by non-UCITS. Adding net assets in other non-UCITS not covered by EFAMA (this includes private equity – €180bn, according to EVCA – and a large portion of the €250bn of hedge funds assets (AIMA data) gives an aggregate market size of about €2,470bn. Applying the same percentages of institutional investors and cross-border investments as UCITS funds, this means that up to €300bn in additional assets could potentially be subject to cross-border private placements (if such a regime existed for open-ended funds). On this basis a conservative estimate of the market potential for cross-border private placement in the EU would be at about €1,000bn.

Table 2: EU investment fund market size (bn€)

Total net assets Total net assets held by non-households*

Potential cross-border business**

UCITS 6.153 3.690 370 – 740

Non-UCITS*** 2.100 1.260 130 – 250

Total 7.873 5.170 520 – 1.040

* Estimate: 60% of previous column; ** Estimate: 10-20% of previous column; *** EFAMA figures plus figures for Private Equity and Hedge Funds which are not included in the EFAMA data (see text).

EFAMA Quarterly Statistical Release No 31; data of 30 September 2007

2.5. Subsidiarity and proportionality

Any potential EU action will have to respect the EU principles of subsidiarity and proportionality, namely that no EU policy should go beyond what is necessary to achieve the objectives and the proposed form of action should be as simple as possible. According to the protocol on the application of subsidiarity and proportionality, EU action could be justified if:

EN 20 EN

– Transnational aspects could not be satisfactorily regulated and the proposed objective could therefore not be sufficiently achieved by the Member States;

– Action by Member States alone would conflict with the requirements of the Treaty;

– Action by Member States would significantly damage Member States' interests;

– Action at Community level would produce clear benefits by reason of its effects of scale compared with action at the level of the Member States.

These principles are primarily of relevance when determining the scope of a potential EU regime with regard to the transactions covered: Such an EU regime could either be restricted to cross-border private placements, i.e. where offeror and investors are located in different Member States; or it could be extended to also provide a safe harbour for domestic private placement, at least in those cases where national regimes appear overly restrictive, and thereby adversely affect the Lisbon objectives of the EU.

In the former case of a purely cross-border regime, EU action towards a cross-border private placement regime appears justified, as only this can provide a single market without additional costs and legal certainty for market participants. The achievement of the single market gains outlined above does not seem possible without EU action. Member States would remain free to operate (even) more flexible or liberal regimes for cross-border private placements and to design their domestic regimes in a way which they consider to be the most appropriate for their country.

However, the parallel existence of both a cross-border regime and a domestic private placement regime could once again create considerable confusion and difficulties in application. First, a proper definition of what constitutes a cross-border private placement would be needed. Secondly, offerors would, in most cases, still have to use separate marketing processes and to prepare two different sets of documents in order to comply with domestic and EU rules. Thirdly, supervisors would have to check compliance with different sets of rules for the same private placement activity, depending on whether there is a cross-border dimension or not.

The rationale for a broader approach to cross-border and domestic private placements would therefore be that it avoids these shortcomings and maximises the overall benefit from private placement for the EU economy. However, this would require a more detailed analysis of national regimes, and in particular of the motivations behind the more restrictive regimes in some Member States, in order to properly balance the pros and cons of a more comprehensive approach compared to the status quo and to an EU regime that is restricted to cross-border private placement.

Potential added value of an 'extended regime' could result from not having different rules for domestic and cross-border private placements, as this could create a situation where an offeror would have (once again) to distinguish between investors according to their location and not simply on the basis of their qualifications. Furthermore, it can be argued that defining the minimum scope and the maximum requirements for any private placement in the EU could result in additional benefits, as it would open up new business opportunities for market participants, even in domestic transactions in those Member States which currently have more restrictive regimes.

EN 21 EN

2.6. Summary of problem description

The following box presents a schematic analysis of section 2.

SUMMARY OF PROBLEM ANALYSIS

Origin of problems: • Inconsistencies between national private placement regimes and absence of EU –level

understandings … due to: – different definitions of eligible investors – different definitions of eligible providers – different product coverage – different disclosure requirements – different registration/notification requirements – different rules on marketing/advertisement

• Lack of transparency of existing national regimes

Consequences at the level of individual cross-border placements:

• Legal uncertainty due to: – national regimes not clearly codified – applicable rules spread over various laws – frequent changes to the applicable rules • Restrictions or limitations on certain cross-border deals • Outright obstacles to cross-border offering in some Member States

Economic consequences of barriers to cross-border private placement:

Sell-side entities: • high costs (registration/notification requirements, adaptation of documents for

intermediaries/distributors, of investor information, of marketing strategy, etc.) • foregone business because of remaining risks • foregone business because of too high costs

Investors: • high costs as providers pass on compliance and administrative costs; • high costs because of lack of competition between sell-side entities; • limited choice of foreign EU/non-EU investment propositions; • reduced opportunities for tailoring investment propositions to preferences of investors that have a

particular investment objective/horizon; • restricted portfolio diversification.

(Small) markets: • reduced market liquidity; • restricted range of investment opportunities for local expert investors; • limitations on cross-border capital raising by local capital-rationed corporate/financial entities.

Consequences for the financial system and wider economy: • Restrictions on portfolio diversification opportunities; • Restrictions on capital raising for entities that do not wish to raise capital in public markets;

EN 22 EN

• Restriction on smaller, tailored and innovative product offerings; • Impediment to the development of pan-European markets for new instruments and asset classes –

and a perception that collective investment schemes are particularly disadvantaged.

3. OBJECTIVES

The overarching objective is to foster single market gains without compromising retail investor protection or financial stability. In operational terms this primarily means ensuring legal certainty for all parties involved in (cross-border) private placement in the EU, providing offerors with market access and eligible investors with better access to financial instruments from other EU markets, while appropriately protecting other investors.

This section attempts to define the characteristics of a solution capable of overcoming the problems described in section 2. It sets out the objectives that any EU-level initiative should aspire to in order to represent an effective solution to these problems.

Any EU response to the problems described in section 2 has as an overarching objective, namely to establish a common and legally secure understanding of the conditions under which cross-border private placement transactions can take place. A functioning regime for cross-border private placement in the EU would contribute to the creation of a reliable legal single market framework for (wholesale) financial services. This, in turn, would help promote the Lisbon goal of greater international competitiveness by, for example, providing innovative firms with better access to (venture) capital. In order to achieve this objective, any EU-level arrangements must be:

• legally secure, and commonly understood and complied with by national authorities and market participants, so as to facilitate placement of all in-scope products to investors in other Member States

• sufficiently comprehensive in order to adequately remove those regulatory and administrative controls which are unnecessary and disproportionate in the context of transactions between seasoned market participants.

3.1. Legal certainty, transparency, and enforceability

An effective EU regime can only function smoothly if it provides a high degree of legal certainty for participants. In the current circumstances, offerors often have to take considerable risks when placing privately as the legal situation is in many cases not very clear. A clearer framework ought to help to significantly reduce these risks and the costs offerors have to bear in order to minimise/avoid the risks resulting in more and geographically more widespread private placements. This in turn would widen investors' choice especially in smaller markets and potentially reduce costs for them. The latter would be particularly relevant for those investors, who are currently obliged to go abroad in order to get access to such offers, owing to a lack of offerings in their home Member State. This should improve liquidity in smaller markets and promote their development. A proper cross-border private placement regime should also effectively shorten delays in accessing host Member States as fewer if any legal searches would be needed before a private placement can take place.

EN 23 EN

3.2. Comprehensive framework which addresses all the main regulatory barriers to mutually beneficial cross-border private placements

If they are to be effective, any eventual EU level arrangements should comprehensively remove the need to comply with all irrelevant retail investor protections. The principal retail investor safeguards that should be removed would include the following.

Mandatory public offer disclosures (public offer prospectus)

As private placements are not addressed to the public, it does not make sense to insist on publication of disclosures in conformity with the requirements imposed when instruments are offered to the public. Instead, qualified investors should be able to obtain all the information they need in order to properly assess an investment proposition in other forms (Memoranda of Offer). This principle is already recognised in EU law through the exemption from the obligation to publish a public offer prospectus for securities which are offered in accordance with the conditions laid down in Article 3(2) of the EU Prospectus Directive. However, the scope of these exemptions is confined to securities.

Product registration or approval

Product approval requirements, which permit a pre-vetting of instruments by supervisors before wider public marketing, have no obvious rationale when instruments are destined solely for placement with expert investors. Product approval and registration requirements were identified as the principal impediment to cross-border private placement of non-harmonised funds.

Common approach to restrictions on promotion, advertising

A typical condition for authorisation as private placement is that there will be no open or wide promotion or advertisement of the offer. There should be a common understanding of the detailed provisions for complying with such restrictions – including in respect of new communication methods – and of the conditions in which prospective investors can be approached.

Rules on conduct of business

European securities law (MiFID) requires that investment firms comply with a series of fiduciary obligations when dealing with their clients (obligations to obtain information about their client, provide information and risk warnings, etc). These rules are a vital safeguard in ensuring that retail investors do not assume excessive investment risk: instead, the intermediary is required to look after their client's interest.

Participants in private placements should be sufficiently experienced and qualified, and accordingly deal on an equal footing. There is therefore no service provider-client relationship. Imposition of conduct of business rules designed to protect retail clients will simply add more cost and red-tape to these transactions. Consequently, under a comprehensive private placement regime these requirements would not be applied to relevant transactions. This principle is also tentatively recognised by the MiFID Directive, which disapplies conduct of business rules in the case of transactions between some MiFID authorised firms and 'eligible counterparties'. However, the scope of this exemption (in terms of services covered, investment firms allowed to trade on this basis) is subject to several arbitrary limitations.

EN 24 EN

3.3. Avoiding onward sale of privately placed investments to the retail market

At the same time, any option would have to ensure that no incommensurate risks or unintended consequences arise from its implementation: an EU regime should neither compromise current standards of protection of retail investors in the EU nor pose a risk to financial stability.

It should ensure that products do not leak from private placements to retail investors or other non-qualified investors without complying with the relevant rules applicable to such distribution to the respective type of investor. By providing an alternative cross-border distribution channel it should take pressure off the current UCITS regime for the distribution of retail funds. Currently, investment firms sometimes get around the lack of a cross-border passport for non-UCITS funds by designing a new product in a way that is in principle compatible with UCITS but stretches its limits to the maximum. This creates the risk of funds that are designed for institutional investors becoming available in the retail market. Although formally compliant with UCITS rules, these products might be too complex for retail investors to fully understand their structures and risk features.

3.4. Coherent articulation with existing EU financial services legislation and national regimes

In a first instance, it needs to be determined whether the envisaged arrangements at EU level are intended to replace national private placement regimes, including for transactions between buy-side and sell-side entities within a single Member State.

As indicated above, there are arguments and a strong market preference for limiting any EU-level arrangements to cross-border private placement transactions (buy-side and sell-side entities in different Member States). If this approach is followed, there will be a need to ensure a coherent co-existence of national and cross-border private placement regimes – including issues such as whether EU-level arrangements give Member States discretion to enlarge the pool of locally domiciled buy-side and sell-side entities that can participate in such transactions.

Any EU-level arrangements governing the private placement distribution channel will clearly interact with provisions of EU law governing public offer and distribution of financial instruments and funds (e.g. Prospectus Directive, MiFID, UCITS, Distance Marketing of Financial Services). Whatever form an eventual EU-level action might take, it will be of paramount importance to ensure that any new provisions are consistent, in their conception and drafting, with the existing legal framework. Great care should be taken in this regard to avoid creating legal inconsistencies and unintended consequences, or regulatory distortions which create artificial incentives to favour one distribution channel (public offer versus private placement) over another.

EN 25 EN

OBJECTIVES

General objectives:

• Reap Single Market gains in wholesale financial services

• Improve market liquidity, especially in smaller financial markets

Specific objectives:

• Improve legal clarity regarding cross-border private placement in the EU

• Reduce costs of cross-border private placement

• Allow greater choice and portfolio diversification for investors

Operational objectives:

• Properly define the boundaries of an EU private placement regime in terms of eligible investors, products and providers

• Ensure coherence with the body of existing EU financial law governing public offer, marketing of securities, investment funds and other financial instruments

• Overcome inconsistencies between national regimes that hinder cross-border private placement

• Ensure that investment propositions offered as private placements do not leak to non-eligible investors without fully complying with retail investor protection provisions

4. POLICY OPTIONS

Options for developing a regime capable of fulfilling the objectives set out above will be presented in two stages:

The first stage concerns the framing and scoping of such a regime. What elements should feature in the proposal in order to ensure that it adequately meets the objective of being sufficiently comprehensive and effective and avoiding unintended or undesired consequences (e.g. exposure of insufficiently expert investors to investment propositions not structured or designed for retail markets)?

The second stage concerns the appropriate instrument or technique to be used to give effect to such a regime. How should it be implemented, i.e. what legislative or non-legislative form should the envisaged measure take? This assessment will be instrumental in determining the level of legal certainty that is achieved by any eventual EU-level arrangements, and the steps needed to ensure coherence with existing EU and national provisions.

4.1. Options for framing and scoping EU arrangements:

Setting appropriate boundaries (in terms of eligible market participants and instruments) will be the single most important task in establishing effective EU level arrangement which fulfil the objectives set out in section 3.

The three key dimensions for scoping any eventual EU level arrangements are:

EN 26 EN

• Population of eligible investors (buy-side) that can be approached with a view to private placement of investments;

• Population of placing entities that are authorised to approach prospective investors with a view to private placement of investments on a cross-border basis;

• Coverage of financial instruments which can be traded under the private placement regime.

Although these items will be discussed separately below, they are highly interdependent. For example, it may be possible to broaden the scope of eligible instruments (to include exotic instruments or off-shore regulated investment vehicles) if the population of eligible investors is narrowly defined. There is no 'do nothing'/'no policy change' option at this stage as the discussion here is only about the potential framework of a private placement regime, and not whether it would be worth implementing.

SETS OF OPTIONS

• Eligible investors:

– Eligible counterparties (MiFID)

– Professional clients (MiFID)

– Qualified investors (Prospectus Directive)

– Quantitative limits

• Eligible providers:

– MiFID eligible counterparty domiciled in the EU

– MiFID authorised intermediary domiciled in the EU

– Provider domiciled in the EU or in jurisdiction with equivalent supervision

– Provider domiciled in the EU or in jurisdiction providing reciprocal access

• Eligible products:

… by type of product:

– No restrictions

– All types of funds

– All types of funds not covered by the Prospectus Directive

… by origin:

– No restrictions

– Originating from EU or a jurisdiction with equivalent supervision

– Originating from EU or a jurisdiction providing reciprocal access

– Originating from EU

4.1.1. Eligible investors

Administrative and regulatory restriction on the marketing of instruments through private placement would not materially improve outcomes for those investors who are able to

EN 27 EN

exercise professional judgement on the quality of proposed investments, and to rely on contractual enforcement mechanisms. However, only certain investors can be confidently expected to meet these conditions. Hence it is crucial to introduce clear and appropriate definition of eligible investors. A range of possibilities have been employed in national and third country private placement regimes. These include:

• Approaches based on the qualification of the investor:

Parties involved in private placement should be experienced, fully qualified traders able to understand and assess offers. They will rely on contract law as a basis for avoiding/settling disputes. The statutory protections designed to protect retail investors provide no relevant protections to investors in private placement transactions, and compliance with those rules involves additional cost, which is not offset by real protection. This does not mean that investors in privately placed investments are deprived of information on which to make informed decision, or of mechanisms to protect their interests. On the contrary, those investors are capable of asking for the information they require, making self-directed investments on this basis and initiating litigation in the event of difficulties.

Focusing on the capacities of the potential investor to make self-directed investments without the benefit of regulatory protection of/or supervisory oversight is consistent with the logic of private placement as presented earlier.

However, national private placement rules differ widely in their approaches to classifying investors. In some jurisdictions only institutional investors are eligible to participate in private placements, while others are more "liberal" in allowing access by other qualified investors, possessing sufficient professional capacity and/or a minimum net wealth, to private placement. The level of personal wealth considered necessary in order to be treated as a qualified investor varies considerably across jurisdictions: the United States enforces a threshold of $2 million to be recognised as an accredited investor; in some cases, investors are allowed to self-certify themselves as eligible.

Existing EU law contains three possible points of reference which may be helpful when defining the population of eligible investors for eventual EU private placement regime (presented in more detail in Annex III):

1. 'Eligible counterparty' status as defined in MiFID: this essentially comprises authorised financial institutions such as credit institutions, investment firms, pension funds, UCITS and life insurance undertakings. It also includes national governments, and national debt agencies, central banks and so on. Member States can expand this list.

2. 'Professional investor' status as defined in MiFID: this includes all authorised financial institutions. It includes national and regional governments. It may also include corporate investors (meeting certain criteria in terms of size and activity of treasury department) and some wealthy individuals (again subject to criteria governing personal wealth and experience);

3. 'Qualified investor' status as defined in the Prospectus Directive: this approach is similar in spirit to the MiFID definition of professional client, but does not provide clear criteria governing the eligibility of small and medium-sized enterprises (SMEs) or natural persons.

EN 28 EN

The substantive difference between these definitions lies in the inclusion/exclusion of regional and municipal public authorities, and the possibility for SMEs or (wealthy) natural persons to participate in transactions.

• Approaches based on quantitative restrictions:

– Limits based on the size of the investment transaction: As a proxy for investor sophistication, some jurisdictions impose minimum amounts on the size of any single investment as an alternative or additional condition. This assumes that only investors having amassed a large amount of wealth and investment experience will be capable of investing large amounts in single investments. A large number of Member States impose minimum tickets for investment in certain instruments (e.g. Ireland imposes a limit of €125 000 for investment in Qualified Investor Funds (QIFs), while Italy requires a minimum investment of €500 000 in 'fondi speculativi').

– Approaches based on quantitative restrictions on the number of investors that can be approached – with limits varying between10 (Spain) and 200 (Italy). The idea behind these numerical thresholds is that they represent an absolute and incontrovertible limit on the scale of the private offering. However, it is an arbitrary approach, capable of giving rise to considerable problems of enforcement and compliance. This approach is criticised, on the one hand, as crude and as constraining the potential developments of distribution by means of private placement. On the other hand, it is deemed to present a considerable legal risk and potentially a threat to retail investor protection. This option will therefore be discarded already at this stage.

4.1.2. Eligible providers/intermediaries

Placing entities are generally restricted to financial institutions authorised in accordance with national or EU law. This helps monitor expertise and resources, and limit the danger of fraud. There are a number of public policy reasons – namely regulatory confidence, legal security, and oversight of the private placement distribution channel – for restricting the population of placing entities to authorised financial institutions.

This approach is also consistent with the current organisation of private equity and venture capital markets – where capital raising companies do not seek to place debt or equity directly with prospective investors. Instead, they employ the services of investment firms or placement agents to assist them.

Which financial institutions should be entitled to engage in cross-border private placement? Again, MiFID provides an existing set of provisions for the authorisation of investment firms having the right to conclude transactions with clients and eligible counterparties on a cross-border basis. However, this framework excludes managers of UCITS funds, private equity funds etc, and other specialised asset managers and intermediaries who are potentially intensive users of any eventual cross-border private placement channel.

Therefore, any consideration of the population of eligible placing entities has to evaluate the appropriateness of:

1. a narrow definition based on the population of MiFID investment firms; or

EN 29 EN

2. a broader definition which encompasses also non-MiFID financial institutions and asset managers authorised in accordance with relevant EU or national provisions.

A further consideration relating to the population of eligible placing entities concerns the treatment of third country institutions. Should third country institutions be entitled to transact with EU domiciled investors who are deemed capable of participating in a private placement regime? This issue can be considered from three perspectives:

1. Maximising the possible opportunities and business under private placement arrangements: this might argue in favour of allowing third country financial institutions to transact with EU-domiciled eligible investors;

2. Regulatory equivalence: should third country institutions be subjected to some assessment of their regulatory status and credentials before being allowed to transact with EU domiciled eligible investors? The right to transact with EU domiciled investors in accordance with EU level arrangements on private placement could be extended to participants from jurisdictions with adequate regulation and supervision. If this approach were to be followed, some basis for undertaking an assessment of regulatory equivalence would be needed.

3. Trade policy considerations: there is a school of thought which maintains that the possibility for third country institutions to place investments directly with European investors, without being domiciled or authorised in EU, should be limited to those third countries which allow comparable freedoms to EU domiciled institutions to transact freely with their qualified investors (‘reciprocity’).

The main options to be discussed could therefore be described as follows: Eligibility on the sell-side would require:

1. Third country authorised financial institutions without restrictions;

2. Providers to be domiciled in the EU or in a jurisdiction with equivalent regulation and supervision;

3. Providers to be domiciled in the EU or in a jurisdiction that provides reciprocal access for EU providers.

4.1.3. Product coverage

The broader the range of instruments that can be traded under these arrangements, the greater the benefits of a private placement regime will be. This suggests that a private placement regime should be developed to support trading in all financial instruments including transferable securities, derivatives and interests in all investment funds.

Markets for securities and many derivatives currently involve extensive trading in secondary markets, organised around exchanges and other transparent trading platforms. If private placement were to be extended to these instruments, it would be necessary to ensure that the development of this distribution channel did not entail reduced levels of transparency which might undermine overall market quality/efficiency.

EN 30 EN

An alternative approach is to take as a starting point the perception that the Prospectus Directive provides a set of provisions which facilitate the cross-border private offer of securities and some closed-end funds (free from obligations to publish a public offer prospectus). To the extent that this perception is borne out, this would suggest a need to focus attention on instruments for which no comparable mechanisms exist. In fact this is the reasoning behind the strong pressure from asset managers to develop EU private placement arrangements which focus exclusively on facilitating cross-border private placement of collective investment schemes (funds).

Therefore, a fundamental consideration for the purposes of developing an EU-wide private placement regime is whether any eventual arrangements should encompass:

1. all financial instruments including transferable securities, derivatives and collective investments;

2. all types of funds and interests in collective investments (including interests in private equity funds structured as partnerships).

Besides the need to determine which types of product should be covered by a private placement regime, it also has to be decided whether the origin of the product actually matters, i.e. whether the distribution of third country investment products via private placement should be allowed. A regime without limitations would probably maximise the effectiveness and efficiency of the global markets. However, concerns have been voiced that such a liberal approach might entail undue risks for investors and possibly facilitate tax evasion/avoidance. An interim solution would be to restrict third country products to those under regulatory supervision of an EU Member State or those that face equivalent regulatory supervision in their domicile. Some stakeholders consider it necessary to require reciprocity of market access.

An approach in stages - starting with a regime restricted to EU originated instruments, but subsequently extended to products domiciled in third countries - could also be considered. This would allow experience to be gained with the operation of the framework for EU originated instruments, pending a decision on the treatment of third country instruments.

Accordingly the following options can be identified in terms of geographical coverage:

1. No restrictions for third country products

2. Requirement of equivalent regulation and supervision in the home country

3. Requirement of reciprocal market access

4. Access for EU domiciled products only

Any of these options could be applied to the three options on the type of product above.

EN 31 EN

4.2. Options for implementation

Options for implementation

• Do nothing

• Case-by-case approach

• Non-legislative action via CESR/Commission

• Amendments to existing EU law

• New purpose-built EU Directive

There is a wide range of instruments available to implement policies at EU level. These range from doing nothing, through actions by Member States to enforcement measures and non-binding and binding rule-making at EU level.

The following five options for the implementation of a potential regime have been considered:

1. 'Do nothing': If no action were taken, the status quo would remain unchanged. The EU ‘private placement market’ would remain fragmented, governed by different - not always compatible - rules regarding concept and scope. Potential offerers would have to find out about these rules regarding the applicable requirements and the eligible investors, products and providers in each target market. The consequences of this have been outlined in the "problem" section above: Inefficiencies in cross-border private placement resulting in missed business opportunities for providers, restriction of access and choice for qualified investors, and potential negative effects on market liquidity and development. Rules regarding private placement would remain fragmented as they would be set on a discretionary basis by Member States without any element of coordination. This option would be relevant where the expected costs of implementing any of the other options were to prove too high compared with the expected benefits.

2. Case-by-case approach: no coordinated action. This option would be based on the principle of 'mutual recognition'. Offerors that were hindered in undertaking cross-border private placement on the basis of mutual recognition would be encouraged to file complaints at the relevant courts. Over time, case-law could emerge which could be used to lift disproportionate or illegal Member State restrictions and establish easier access and a shared understanding of private placement in the EU.

3. Non-legislative action via CESR/Commission: Member States could undertake to align definitions and regulatory frameworks according to best practice in the EU or even in third countries, such as the US. CESR or the Commission could develop guidance documents to this end. Any such action would have to be based on existing law, which would restrict the flexibility and potential scope of this option. As it would be non-binding in nature, Member States would be free to decide whether and how to follow such guidance. This approach could also develop on a bilateral or multilateral basis. In such a case, it could be called "action at national level".

4. Amendments to existing EU law: At least some aspects of a cross-border private placement regime could be based on existing EU provisions, in particular MiFID and the Prospectus Directive. These instruments can be useful for establishing a clearer understanding of an EU private placement regime, in particular when trying to define

EN 32 EN

which investors in private placements could be targeted. While still based on existing law, this option would go further than the previous one by not only interpreting, but actually changing, the legal framework. Although it would have to be ensured for each individual amendment that there are no adverse implications for the original objectives of the laws, most, if not all, of the options on substance outlined above could be implemented by amending the respective parts of the Directives.

5. New "purpose-built" EU Directive: A proposal for a new Directive on private placement could be made to ensure legal certainty both for those qualified to trade under such a regime and also for those outside, such as retail investors, by taking appropriate measures against leakage. Although starting with a 'blank sheet of paper', the development of this option would also have to take into account the existing legal framework, in particular the relevant provisions of the MiFID and Prospectus Directives in order not to interfere with those of their provisions that are working well. The major challenge would be to draft a Directive that deactivates rules for some situations that have not been established by the same Directive, but might be laid down at national level in very different ways in EU Member States. It is most likely that this option would also require provisions/mechanisms for dealing with the interaction with some amendments to existing Directives like MiFID and the Prospectus Directive.

5. ANALYSIS OF IMPACTS

Any analysis of impacts can only be rudimentary at this stage. This analysis focuses on the economic impacts of the various options outlined in the previous section, once again distinguishing between 'scoping and framing' and implementing vehicles. No significant environmental or social impacts are expected. Tables at the end of each sub-section summarise the respective analysis. The viability of the various options is assessed in the concluding paragraphs.

This chapter provides a preliminary assessment of the likely impacts of the different options. These are assessed primarily against the following criteria that flow from the objectives outlined in section 3 above: - Sell-side: costs, legal certainty and consistency; Buy-side: choice, price, time and protection; Markets: liquidity and transparency.

5.1. Options on 'scoping and framing'

5.1.1. 'Do nothing'

The impacts of doing nothing would be those illustrated in the problem description above and in the subsection on administrative burden below. Doing nothing would not help achieve the objectives outlined above. On the other hand, the most commonly mentioned risks of a private placement regime, namely leakage to retail investors and undermining of financial stability, would obviously not occur. However, it has not been demonstrated that these risks are actually present in those Member States or third countries that have put appropriate safeguards in place.

The problem description has demonstrated that private placement is a very useful instrument and provides considerable benefits at national level, both within the EU and in third countries. The difficulty in terms of reaping these benefits at EU level is mainly due to legal uncertainty

EN 33 EN

about the applicable rules. No major improvements can be expected if no action is taken. Therefore, the "do nothing" option does not appear to be advisable while it is still unclear whether the costs of implementing an EU regime outweigh these potential benefits.

5.1.2. Eligible investors

In the previous section, three main options have been identified with respect to eligible investors. The fourth option - quantitative limits - could, in theory, be combined with any of the first three:

1. 'Eligible counterparty' status as defined in MiFID

2. 'Professional investor' status as defined in MiFID

3. 'Qualified investor' status as defined in the Prospectus Directive

4. Quantitative limits

The substantive difference between the above definitions of eligible investors (options 1-3) is the possibility for sub-national public authorities, SMEs and wealthy natural persons (HNWI) to participate in transactions.

The decision about whether public authorities are to be included or excluded could be left to the government of the respective Member State, as their relevance in private placements and their qualifications differs considerably across the EU. On the other hand, SMEs and HNWI are seen as being crucially important as investors in certain products under discussion.

The relevant experience of this investor class in this kind of trade is being advanced as an argument to justify their access to private placements. Their participation would be important to achieving the objective of liquid financial markets. Yet, it would not be easy to enforce such a criterion. Offerors would have to collect and keep some proof of the eligibility which might require information that the potential investor might not want to reveal. Ensuring somehow that potential investors possess sufficient knowledge and expertise would be even more difficult.

Option 2 and, in particular, option 3 would therefore create a greater risk of exposure of insufficiently qualified/experienced investors to private placements.

Option 1 is more restrictive and clearly defined. It would considerably restrict the set of potential investors. However, this might make a cross-border private placement regime unattractive for some investment instruments, which are mainly invested in by private individual investors. The benefit of such an option is that it would take care of most of the concerns of supervisors regarding exposure of inexperienced investors and it might be possible to "switch off" more requirements than under the other options.

It has to be stressed, however, that parties to private placement transactions will in any event remain bound by fiduciary and regulatory requirements to perform due diligence assessments before making investments, and they will be accountable to governance bodies and supervisory authorities for these decisions. Therefore, if a party does not feel that it is able to assess an offering, it should either seek advice from competent bodies or refrain from investing in such a product. This, however, is true of both private placements and public offers.

EN 34 EN

While parties will always be able to rely on contractual and other private dispute settlement mechanisms, the enforcement of contractual rights in courts can admittedly be a time-consuming and costly endeavour and therefore might require a certain financial capacity and legal expertise that economically smaller entities may not always possess.

Quantitative limits in the form of minimum investments as in Art. 3(2) (c) and (d) of the Prospectus Directive provide a useful absolute criterion to delimit the private placement regime. A minimum investment amount is a clear criterion that helps to get around some of the problems linked to qualitative criteria. The above discussion has illustrated the difficulties of finding uniform qualitative criteria that do justice to all types of investors and all types of investment products/strategies. Without the safe harbour of a quantitative limit there would be a considerable risk of excluding important classes of investors for some of the investment products concerned. A typical example would be individual or family investors in private equity funds. These are an important investor category, although they would usually not qualify as eligible under MiFID or Prospectus Directive definitions.

Probably the most important counter-argument is that such thresholds might send the wrong signals and lead investors to invest more than is appropriate in a specific instrument in order to reach the threshold. Investors with sufficient capital but lacking sufficient knowledge and experience might also enter into negotiations with counterparties with whom they do not match. This could run counter the objective of appropriate investor protection.

In the light of this discussion, it might be most appropriate to restrict a potential private placement regime to investors as defined as eligible counterparties under MiFID (option 1). In doing so, many of the concerns about a liberal approach towards the other elements of substance could be dispelled or at least considerably reduced. After some years of experience with such a regime and an interim evaluation, its scope could be broadened to include other types of investors, for example, professional investors as defined by MiFID.

However, the impact analysis was unable to reach a clear finding as to the implications of using one or other definition, since no reliable information on the share of the different investor classes in private placements was available. The exclusion of professional investors/HNWI could significantly reduce the anticipated improvement in market liquidity, especially in the venture capital segment. This, in turn, could diminish the beneficial effect on access to finance for SMEs and innovation. On the other hand, it was not possible to demonstrate with sufficient certainty whether relevant investor protection issues would arise if eligibility were extended to professional investors. The validity of the concern that professional investors might not always be on an equal footing with offerors could not be refuted. The same arguments apply regarding whether or not to set quantitative limits. On the basis of existing information, therefore, it is not possible to come to a clear result regarding the most appropriate definition of an eligible investor in a potential EU private placement regime.

EN 35 EN

Table 3: Summarising the impacts of different options for the definition of eligible investors

Impacts on providers/offerors Criterion:

Option: Legal certainty Costs

'Eligible counterparty'

+ operational, but narrow definition + reduced legal costs

'Professional investor'

+ broader but less operational definition + reduced legal costs

'Qualified investor'

(+) better than status quo but multitude of criteria

(+) better than status quo but multitude of criteria

Quantitative limits

+ for minimum investments as easy to check (+) for wealth of investor as more difficult to check

(+) harmonised regime avoids multiple checks for compliance

Impacts on investors Criterion:

Option: Investment

choice Price Time Retail investor protection

'Eligible counterparty'

+ for eligible investors

+ for eligible investors

+ for eligible investors

++ set of investors very narrowly defined

'Professional investor'

+ for eligible investors

+ for eligible investors

+ for eligible investors

+ relatively clear and appropriate definition

'Qualified investor'

+ for eligible investors

+ for eligible investors

+ for eligible investors

(+) better than status quo but multitude of criteria

Quantitative limits

+ for eligible investors

0 no significant impact

+ for eligible investors

-- suitability might not be ensured

Impacts on markets Criterion:

Option: Market liquidity/ development Market transparency/ financial stability

'Eligible counterparty'

+ restricted expansion of markets ++ limited coverage of investors limits risks

'Professional investor'

+ considerable expansion of markets

+ still manageable set of investors

'Qualified investor'

++ maximum expansion of markets

(+) wide scope complicates supervision

Quantitative limits

+ more transactions (-)greater number of players potentially more difficult to supervise

0: no change; (+): minor/uncertain improvement; +: improvement; ++: considerable improvement; (-): minor/uncertain deterioration; -: deterioration; --: considerable deterioration

5.1.3. Eligible offerors

The first question to be settled is whether certain ‘non-MiFID entities’ should be eligible or not. The options are:

1. Eligible counterparty status as defined in MiFID domiciled in the EU

2. Eligible counterparty status as defined in MiFID domiciled in the EU plus non-MiFID financial institutions and asset managers authorised in accordance with relevant EU or national provisions.

The main difference in the impacts of these two options lies in the costs to offerors on the one hand, and the cost of supervision on the other. Option 2 would reduce the costs of private

EN 36 EN

placement for those that would be covered by this option. Option 1 would require them to employ the services of eligible investment firms or placement agents. Allowing non-MiFID firms to place privately would create a specific distribution regime that would differ from the one newly established by MiFID. This would make supervision more complex, as a wider and different set of market participants would have to be supervised.

Secondly, the question of third country access needs to be discussed. Here, the following options have to be assessed:

1. Third country-authorised financial institutions without restrictions;

2. Providers to be domiciled in the EU or in a jurisdiction offering reciprocal access for EU providers;

3. Providers to be domiciled in the EU or in a jurisdiction with equivalent regulation and supervision.

A first solution would be a regime without any restrictions on offerors from third countries. There would be no problem regarding legal clarity and no administrative costs for proving eligibility. Investors would have maximum choice, and competition should drive costs down. Free inflow would help market liquidity. On the downside, problems could arise regarding investor protection and supervision of financial stability. It might be difficult for investors or enforcement authorities to enforce their rights vis-à-vis a seller located in an off-shore jurisdiction without a proper representation in the EU. Supervisors could have problems tracking global financial flows.

Alternatively, third country access could be based on reciprocity. This argument follows trade policy lines rather than the objectives outlined above. As most of the relevant jurisdictions seem to enforce fairly liberal private placement regimes, a reciprocity requirement would not have much of an impact in any case, but closely resembles the first option.

Instead of reciprocity, third country access could require equivalence of regulatory and supervisory regimes in order to ensure that investors are faced with offerors that have to comply with requirements similar to those applying to EU offerors. The impact of such a requirement would depend on the liberality of the EU regime and on how stringently the equivalence principle is applied. Since equivalence would have to be determined before a private placement could take place, such a regime could take some time to become effective. Considerable effort would be required to develop, negotiate and implement such a regime.

A compromise solution would be to require providers based outside the EU to use an intermediary/placing agent authorised and supervised in the EU. This would ensure that at least the direct counterpart of the investor is registered in the EU and therefore has to comply with the respective rules. In the event of problems it would be easier to get hold of this party.

A completely open regime might – even if only in the medium- or long term – be exposed to certain risks regarding market transparency and investor protection.

Restricting eligibility of offerors on the basis of reciprocity does not seem appropriate. Requiring reciprocity is, on the one hand, a mercantilist approach to international trade that is contrary to free competition and, on the other hand, redundant in so far as relevant financial centres already grant access to EU offerors.

EN 37 EN

The option of equivalent supervision would need to be analysed in more detail in order to assess the potentially high costs of establishing equivalence on a case-by-case basis against the potential improvement in market transparency and investor protection.

Table 4: Summarising the impacts of different options for the definition of eligible sell-side Impacts for providers/offerors

Criterion:Option: Legal certainty Costs

MiFID entities + consistent with existing definition + MiFID entities and authorised financial institutions and asset managers

+ broader scope, but inconsistent with MiFID

+

No limits + no exclusions + no need to proof eligibility Reciprocity (-) risk of changes - request/initiate reciprocity Equivalent third country supervision

(-) risk of changes - need to prove equivalence

Impacts for investors Criterion:

Option: Investment choice Price Time Retail investor protection

MiFID entities + more offerors (-) more competition (+) more clarity (+) more clarity MiFID entities and authorised financial institutions and asset managers

+ even more offerors (-) even more competition

(+) more clarity (+) more clarity

No limits on third country offerors

++ widest choice possible

++ most competition + no delays to access

-- if no proper boundaries

Reciprocity (+) but limited offer from third countries

(+) but limited offer from third countries

-- until reciprocity established

0? if more or less equivalent

Equivalent third country supervision

(+) but limited offer from third countries

(+) but limited offer from third countries

-- until equivalence acknowledged

0

Impacts for markets Criterion:

Option: Market liquidity/ development Market transparency/ financial stability

MiFID entities + more offerors + consistent sell-side definition for distribution at EU level

MiFID entities and authorised financial institutions and asset managers

+ even more offerors (+)

No limits on third country offerors

++ free inflow - no control of global flows

Reciprocity + limited inflow - risk of non-equivalent supervision Equivalent third country supervision

+ limited inflow (-) no direct supervision

0: no change; (+): minor/uncertain improvement; +: improvement; ++: considerable improvement; (-): minor/uncertain deterioration; -: deterioration; --: considerable deterioration

5.1.4. Eligible products

Two options were identified in terms of product coverage:

1. All financial instruments, including transferable securities, derivatives and collective investments;

2. All types of funds and interests in collective investments (including interests in private equity funds structured as partnerships).

EN 38 EN

Option 1 would give all financial investments the same access to cross-border private placement as a distribution channel. This would ensure legal clarity and minimise supervisory and compliance costs. Eligible investors would have access to and choice among all types of products under the same regime and therefore investment decisions would not be biased. On the other hand, they might also be confronted with very complex products which they might not fully understand.

However, the analysis and discussions of this issue during the last year did not produce any significant demand for such a regime from providers of investment products other than funds. Therefore the question arises whether such a broad-scale approach would be justified.

The need for a private placement regime for funds and CIS, option 2, on the other hand, has been demonstrated much more forcefully: (Open-ended) non-harmonised investment funds are faced with particular problems. There are no formally recognised channels for either public or private cross-border distribution of these products. It is not possible in certain Member States, and possible only on a restricted basis in others, subject to higher transactional costs and acute legal uncertainty. A private placement regime could be particularly beneficial for originators (fund managers) and distributors of these products, in that it would permit access to population of large, institutional investors. It will also limit the danger that managers of such products may find themselves constrained to structure institutional investment strategies into a retail wrapper in order to secure access to partner country markets.

Other investment funds – including harmonised UCITS funds – also see benefit in being able to make use of an effective cross-border private placement channel. Managers and distributors of such UCITS funds would in effect have a choice between public marketing on a cross-border basis (subject to compliance with the formal and somewhat onerous notification requirements of the UCITS Directive) and distribution restricted to a limited population of expert investors via private placement.

Furthermore, a regime limited to closed-ended investment funds or non-harmonised open-ended funds could permit some "quick wins": agreement on such a regime could more easily be achieved than on a regime that covers other types of funds or even other securities. However, there would have to be an analysis to determine whether such a restricted regime could deliver sufficient benefits to make it worth implementing; and whether the tactical and pragmatic reasons for focussing on investment funds are justified. In particular, much of this reasoning hinges on the perception that the Prospectus Directive provides a functioning mechanism for cross-border private offer of securities and (some) closed-ended funds. This perception is not universally shared. The functioning of the Prospectus Directive will be the subject of a review (to be published in early 2009) which will hopefully shed more light on the extent to which this Directive can be deemed to facilitate the cross-border private offer of securities.

Such a regime restricted to funds would ensure a uniform platform for these products. As this regime would be clearly defined, it should provide an appropriate level of legal certainty.

Both options can be further specified in terms of geographical coverage:

– no restrictions for third country products

– requirement of equivalent regulation and supervision in the home country

EN 39 EN

– requirement of reciprocal market access

– access for EU domiciled products only.

The impact analysis mirrors that of the eligibility of third country providers above and will not be reproduced here.

Table 5: Summarising the impacts of different options for the definition of eligible products Impacts on providers/offerors

Criterion:Option: Legal certainty Costs

All funds (+) improvement for all funds (+) some additional savings All CIS and securities + improvement for most products (+) some additional savings 3rd ctry access + improvement for most products + some additional savings

Impacts on investors Criterion:

Option: Investment choice Price Time Retail investor protection

All funds + more choice for a wider category

(+) lower costs for providers, more competition

(+) products could be provided faster

(+)clear uniform borderline in the EU

All CIS and securities

+ more choice for a wider category

(+) lower costs for providers, more competition

(+) products could be provided faster

(+) clear uniform borderline in the EU

3rd country access

+ more choice for a wider category and geogr. spread

(+) lower costs for providers, more competition

(+) products could be provided faster

(-) risk of uncontrolled inflow and leakage

Impacts on markets Criterion:

Option: Market liquidity/ development Market transparency/ financial stability

All funds (+) more supply and demand (-) supervision more difficult than in a closed national regime

All CIS and securities (+) more supply and demand (-) supervision more difficult than in a closed national regime

3rd country access + more supply and demand - supervision more difficult than in a closed national regime

0: no change; (+): minor/uncertain improvement; +: improvement; ++: considerable improvement; (-): minor/uncertain deterioration; -: deterioration; --: considerable deterioration

As regards the type of product, there is a presumption that investment funds would be likely to benefit most from an EU regime in the short term. However, at this stage, it is not clear that a restriction to funds would be the best solution on a long-term basis. It can be argued that such a restrictive regime would not add much value and that distinguishing some funds from securities would be difficult, particularly given that for some of the alternative investment fund types there are no commonly agreed definitions. But nor is there a clear reason for restricting the arrangement to funds. There is no obvious feature from a regulatory perspective that distinguishes funds from other (transferable) securities and that would justify such a restriction. The only reason for doing so is the prevailing perception that the Prospectus Directive provides an effective regime for transferable securities. This proof of the pudding is still very much in the eating. Broadening the scope of the regime would, however, require a careful analysis of the impacts that this might have on existing regimes, including the private placement exemption in the Prospectus Directive. The ongoing review of that Directive is expected to shed more light on this question.

Regarding geographical coverage, the same logic as for offerors applies: there is no obvious reason to restrict investors' choice once it has been agreed that they are capable of taking care of their own interest.

EN 40 EN

Administrative Burden

As regards administrative burden, proposed measures should leave as much scope for national decision as possible. Policy options should also be ranked according to the financial and administrative burden falling upon the Community, national governments, regional and local authorities, economic operators and citizens. That burden has to be as low as possible and proportionate to the proposed objective(s). Overall, it is not possible to assess changes in administrative burden in any greater detail.

As has been said above, compared to public offering, private placement should result in a significant reduction in administrative burden for offerors and supervisors. Offerors would save the costs of frequently checking national requirements. These costs can be very high compared to the amounts invested in a specific Member State. In cases where legal advice is against a private placement in a specific Member State, these costs would not be covered by any income streams but would represent a loss that had to be covered by other means. Usually they will be charged to other investors participating in the placement under question. Furthermore, offerors would be relieved from registration, reporting and disclosure requirements. The exact extent of such relief would depend on the details of a regime that was ultimately implemented. Supervisors would not have to check for all these documents and would thereby save time and resources.

The extent to which these expected savings would materialise under the different options would depend primarily on the likelihood of achieving the objectives and the extent to which this would happen.

Owing to the scarcity of data it is not possible to assess the current administrative burden that results from the absence of an EU private placement regime. This is not only due to the fact that private placement is confidential and contractual in nature, but also to the fact that in the current situation the costs are supposedly prohibitive in many cases, i.e. it is not possible to assess the potential cost of something that does not take place because of those very same costs.

Regarding the first set of elements (coverage of participants and products), the potential scenario is likely to be: the wider the coverage, the higher the overall savings in terms of administrative burden.

All requirements to be switched off (disclosure requirements, host registration/approval; transaction reporting; host promotion requirements etc.) would have the potential for significant reductions in administrative burden. The only exception might be conduct of business rules which in themselves are less of an administrative burden than focusing on the relationship between offeror and investor. In addition, these rules might well change, at least while the investor side still has the status of a MiFID eligible counterparty.

Obviously, for each item, potential savings in administrative burden depend on how liberal the regime would be, i.e. the extent to which requirements were relaxed and how far the resulting regime would be harmonised and stable.

5.2. Options for implementation

With regard to the instruments that could be used to implement an EU private placement regime, the analysis of impacts is primarily restricted to an assessment of their respective

EN 41 EN

feasibility, costs and the time needed for implementation and the likelihood of achieving the objectives defined above.

5.2.1. 'Do nothing'

Doing nothing would not help achieve the objectives outlined above. As the situation has not changed much in recent years, it cannot be expected that Member States would take initiative now as no such intentions were signalled to the Commission during the consultation phase of this impact assessment. The potential risks of a private placement that are sometimes mentioned, namely leakage to retail investors and undermining of financial stability cannot be avoided completely as they could still occur under national regimes. All parties involved would have to bear a relatively large administrative burden. However, so far the Commission has been shown no evidence that such risks exist, e.g. that they have actually occurred in a Member State or in a third country with appropriate safeguards.

5.2.2. Case-by-case approach

Such an approach would be feasible in theory. However, in practice it has not happened yet and there are no indications to suggest that it is likely to happen in the near future. Taking Member State authorities to court for blocking a cross-border private placement is most liable to be very expensive and time-consuming, as such a case would be likely to go through various levels of jurisdiction, potentially up to the European Court of Justice. Furthermore, even if such a case was won, this would not necessarily help the general case of cross-border private placement very much, as every placement is different and authorities could refuse to proceed by analogy in subsequent cases. Investment firms stress that, for them, fostering a good relationship with national supervisors is of the utmost importance. Taking supervisors to court on one file would risk ruining the relationship, thereby making 'life much harder' for the investment firm when approaching that supervisor in the future.

Clarification and improved legal certainty could only be achieved over a longer period of time, if at all. Therefore, the impact on the legal situation and markets would be marginal. Improvements would materialise only over the long term.

However, as the process would evolve in a non-coordinated manner, it could produce unintended consequences, or at least not the results hoped for. Overall direct costs would be relatively low as the "Brussels" legislative engine would not have to be started up: the EU legislator, national authorities and legislators would not be faced with major costs. Instead, the individual stakeholders would have to pay. As it is likely that a series of cases would be needed in each Member State concerned, total costs could nevertheless end up being considerable and the whole process would take a long time.

The idea that this decentralised approach might result in a smoothly functioning regime for private placement with a high level of legal certainty in the EU seems most unlikely. At best, a trend towards a common understanding about the role and features of private placement could be expected. As this approach seems unlikely to change appreciably, it is also unlikely to have any impact on financial stability or investor protection.

The administrative burden of a case-by-case approach is hard to assess. Administrative burden would, in the first instance, be high for those companies filing court cases and for the respective courts as they would have to prove their cases. Subsequently, and depending on the outcome of the cases, authorities and market participants would have to adjust their

EN 42 EN

procedures every time. However, if this were to lead to a change in the private placement regimes of some Member States, then a further administrative burden would be involved in the form of costs for legislating and implementing new rules and adjusting to these rules. As this would happen on a case-by-case basis at Member State level, frequent changes would be necessary and market participants would have to continue to monitor the situation very closely. Whether a reduction in administrative burden could be achieved in the long term would depend on the extent to which national regimes were simplified and harmonised.

In the light of this, this option cannot be expected to achieve the set objectives or to solve the current problems in any way within a reasonable timeframe.

5.2.3. Non-legislative action via CESR/Commission

The Commission and CESR could coordinate their efforts towards a common understanding and alignment of national definitions and requirements. This could be done via guidance and interpretative documents – to the extent that clear and operational provisions of EU law can be identified which support an 'interpretation-based approach'. Such work would be of non-binding legal nature and Member States would maintain their discretionary power over whether to comply with non-binding interpretations. The only real 'sanction' would be moral suasion and peer pressure. Under such conditions, it cannot be taken for granted that greater convergence of national approaches will result. Nevertheless, some improved market access could be achieved at low cost in those areas where existing EU provisions are sufficiently clear and enforceable.

The feasibility of this option is relatively hard to assess as it would require CESR and the Commission to create a consistent framework on the basis of existing law which would have to be 'stretched to its limits'. Such a far-reaching task might go well beyond CESR's capacities in particular. As no legislative work would be needed, it could make relatively rapid progress. Yet, the time needed for discussion in the respective EU committees and for subsequent transposition should not be underestimated. It would be possible to achieve results at very low cost compared to other options.

A coordinated effort to reach a common understanding of private placement and to align national definitions and requirements of private placement could lead to a degree of improved legal certainty and increase market efficiency. Improvements would be constrained by the limits inherent in the current EU and national legal frameworks. As work could be properly coordinated and aligned with existing measures, in principle a high degree of consistency could be achieved and unintended consequences for retail investors and financial stability could be avoided. The effectiveness of this approach would very much depend on Member States' willingness to implement such guidance in their national rulebooks. This approach would evolve only over a relatively long period of time.

Coordinated CESR/COM guidance would be a mix of action at Member State and EU levels. This option would potentially help reduce administrative burden, but - as has been outlined above - the extent to which this might happen is hard to gauge. Significant reductions would require a considerable effort by Member States to implement such guidance in a relatively harmonious way.

As this option would present CESR and the Commission with an extremely demanding task and because it is non-binding, the feasibility and effectiveness of this option have to be seen

EN 43 EN

as critical. Especially the achievement of the main objective of providing legal certainty to offerors of funds, in particular, would seem very unlikely.

5.2.4. Amendments to existing EU law

To assess the feasibility of this option it would be necessary to know exactly which of the elements of substance should be implemented. Some elements of a cross-border private placement regime could be based on existing EU provisions. MiFID and the Prospectus Directive, in particular, could be used to switch off disclosure requirements and conduct of business rules. However, to build a private placement regime that is comprehensive in terms of market participants and product coverage, including the most relevant investment products and providers concerned, and non-harmonised funds in particular, as well as requirements to be disenabled such as local product registration or approval requirements, would require a considerable widening of the scope and provisions of the respective Directives. Major amendments such as these to several Directives in parallel might actually be more difficult and time-consuming to achieve than drafting a new law.

The precise impact of this option would depend on the extent to which existing legislation were to be changed, i.e. how comprehensive would such a regime be? If it was relatively comprehensive, it ought to achieve the same impacts as the next option, namely a new Directive. Otherwise there is a risk that this option might result in significant inefficiencies because of inadequate coverage and/or sub-optimal rules. Overall, there is a risk that the existing Directives could suffer, in the sense that they would no longer achieve their original objectives because of those amendments.

Administrative burden could be reduced considerably through the establishment of a comprehensive EU private placement regime. One example is the significant costs of legal advice - resulting from the current uncertainty about the rules in place in Member States - which could be minimised. This is all the more important as they appear to be prohibitive in many cases, i.e. for smaller offerors and for smaller markets.

Using MiFID to establish an EU private placement regime seems prima facie self-evident as the eligible counterparty regime has already gone some way down this road. However, installing a full private placement regime would require major amendments to the Directive. Those amendments would have to include elements, such as product registration, which are not in line with the spirit and the subject matter of the Directive.

The same would be true of the Prospectus Directive. In addition, widening the scope of the Directive to enable, for example, all non-harmonised funds to take advantage of the exemption of Art. 3(2) would mean that first of all these products would also fall under the provisions of the Directive if the conditions of Art. 3(2) are not fulfilled. Whether this would be in the interest of the industry is still, at the very least, doubtful.

5.2.5. New purpose-built EU Directive

Proposing a Directive on private placement would be feasible as the Commission has the right of initiative and would be justified under the principle of subsidiarity if other options could not ensure the necessary outcome. As with amendments to the existing Directives, drafting new EU legislation would be a time-consuming and relatively expensive project.

EN 44 EN

Even a new Directive would not start from scratch, but would have to take the existing legal framework into account and have to ensure that it is consistent with it. But it would probably the best way to ensure legal certainty both for those qualified to trade under such a regime and also for those outside the regime, like retail investors, by taking appropriate measures against leakage. It would also effectively achieve its main objective of single market gains by providing net benefits in terms of reduced costs for providers and wider choice at lower costs for investors.

A major difficulty in designing such a regime would be ensuring that it does not lead to disruptions in other markets by discriminating against certain instruments. It would have to be properly aligned with existing law at national and EU level in order to minimise unintended consequences. A tailor-made and properly designed regime would minimise the risks of leakage and of negative impacts on financial stability.

The table below summarises the assessment of the different instruments in terms of their feasibility, costs, delays and the respective likelihood of achieving the overall objectives. While the non-legislative options potentially rank higher when it comes to the costs and time involved in implementing them, the legislative options offer a greater likelihood of achieving the objectives.

The assessment of administrative burden would be similar to that for amendments to existing EU Directives, as it would achieve the objectives to a comparable extent and with comparable burdens for the different levels.

Table 6: Impact analysis for instruments Likelihood to achieve objective: Criterion:

Option:

Feasibility Costs Time needed Single

market gains Retail investor

protection Financial stability

Case-by-case approach high (low) very

long low low neutral

CESR/Commission guidance (high) (low) neutral low good good

Amendments to existing EU law high high long good good good

New purpose-built EU Directive high high long good good good

6. COMPARING THE OPTIONS

The table below illustrates that an EU private placement regime would potentially have positive impacts on all market participants. However, the impact analysis presented in this report was unable to provide conclusive evidence on a number of issues, in particular the definition of eligible investors, the scope both in terms of investment products and in terms of transactions (cross-border / domestic). Therefore there remains a substantial risk, firstly, of getting the framework wrong and, secondly, of creating a framework which leads to (implementing) costs that outweigh actual benefits.

In view of these uncertainties and the issues that were not able to be addressed in a satisfactory manner, it is impossible to give clear advice on any of the options discussed above with a sufficient degree of confidence at this stage. Instead, it is recommended that the

EN 45 EN

analysis should continue, perhaps with the support of an external study. This work should develop in two directions:

First, it should provide evidence of the economic benefits of private placement for actors in the financial service sectors as well as the economy as a whole. This work should explicitly include an investigation into potential adverse impacts of private placement on certain parts of the markets or certain investors. It would be based primarily on experience gathered at national level in the EU and third countries and should give a clearer indication of the outcomes of existing regimes.

Table 7: Expected effects of an EU private placement regime on affected parties

Affected parties Impacts Nature of

impact Likelihood of

impacts

+ ↑ business opportunities permanent Sell-side + ↑ efficiency permanent High

+ ↑ investment and diversification opportunities permanent Medium Buy-side - ↑ risks permanent Low

Business + ↑ improved access to finance permanent, indirect Medium

Authorities -/-- efforts to agree & implement changes one-off certain Effects are assessed against a scenario of no change in policy: positive: +; negative: -; strongly negative: --

It would also help to avoid the unintended consequences of an EU private placement regime. It should look into the question of whether private placement could replace public trading to a significant degree, and if so, in how far this might affect investors that are not eligible for private placement. This would be of particular importance for a regime potentially covering cross-border and domestic private placement of a broad range of products with a wide range of eligible investors.

Secondly, it should investigate the potential impact of cross-border private placement and the likely impact of an EU regime. This work stream would start by estimating the costs of the lack of an EU regime and then develop a number of scenarios along the potential regimes outlined in this impact assessment in order to assess their impacts. This should help in finding the most appropriate definition of the main features of a private placement regime.

External work should be launched in autumn 2008 and to be concluded within one year. On the basis of the results of the studies and internal research, the Commission will finalise its impact assessment work in the beginning of 2010.

At the present stage there would be a considerable risk that the scope of such a regime could not be defined in an optimal way. This could lead to a situation where the regime would not function effectively because of limitations that are too restrictive or where market participants might become involved in private placements for which the regime would not be suitable. In either case it would be necessary to review and amend the regime as soon as such failures become obvious. This would cause unjustifiable costs and disruptions for all stakeholders and regulators.

EN 46 EN

7. MONITORING AND EVALUATION

No details can be provided here, as no clearly defined proposal is being made and the impact assessment work is to continue.

The appropriate measures for monitoring and evaluation would depend very much on the details of any potential proposal. Proxies will have to be used as in the case of this impact assessment. Monitoring and evaluation will focus on the efficiency and effectiveness of the regime in achieving its objectives without impacting negatively on market stability or retail investor protection. It is most likely that it will have to be based on specific studies because of the particularly sensitive nature of private placement and the lack of official data.

Any monitoring and evaluation would be designed in a manner that is in conformity with the relevant guides at Commission and Directorate-General level. These would have to be properly aligned with similar actions concerning the functioning of other relevant EU legislation, in particular the Prospectus Directive and MiFID.

EN 47 EN

Annex I: Glossary/Acronyms

AIMA: Alternative Investment Management Association; trade association for Hedge Funds, Managed Futures and Managed Currency Funds

CESR: Committee of European Securities Regulators; an independent body of regulators from EU Member States that advises the European Commission on securities policy issues.

CIS: Collective investment schemes; arrangements that enable investors to pool their assets and have these professionally managed by an independent manager

Closed-ended fund:

Investment funds with restrictions on the amount of shares the fund will issue.

EFAMA: European Funds and Asset Management Association; European association of national fund associations and corporate members

ESC: European Securities Committee

ESME: European Securities Markets Expert Group

EVCA: European Private Equity and Venture Capital Association; European association of the private equity and venture capital industry

IAB: Impact Assessment Board

INREV: European Association for Investors in Non-listed Real Estate Vehicles; representing market players in the sector

IORP Directive:

Directive 2003/41/EC on the activities and supervision of institutions for occupational retirement provision

IPO: Initial public offering

HNWI: High net worth individuals; individual investors disposing of a significant wealth to invest in financial assets of one million Euro or more

MiFID: Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments

NHF: Non-harmonised funds; investment funds that do not benefit from the EU passport of UCITS because they do not comply with the provisions of the Directive

Open-ended fund

Investment funds where the number of units/shares in issue increases as more people invest and decreases as people take their money out.

PD: Prospectus Directive; "Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC"

SEC: US Securities and Exchange Commission

SFC: Hong Kong Securities and Futures Commission

SME's: Small and medium-sized enterprises

UCITS: Undertakings for collective investment in transferable securities; EU-regulated retail investor funds

EN 48 EN

Annex II: Elements of private placement regimes besides Prospectus Directive

Table AII.a: National private placement rules

The first column of the table describes how Member States characterise their private placement regime (if different from Article 3 PD).11 Some Member States offer additional exemptions from the requirements for public offerings beyond those provided in the Prospectus Directive. This is depicted in column 2. They apply to the types of offers described in the previous column or by Art.3(2)PD. The last column lists specific investment vehicles that are only open to qualified/ institutional investors and are exempted from some of the requirements of public offers.

MS Private placement definition Other exemptions / obligations Special vehicles

AT - - 'Spezialfonds'12

BE Offers that comply with Art.3(2) PD and offers of open-ended funds with minimum investment per investor and issue of €250.000 are not considered as public offerings.

Private placements benefit from freedom to market and no rules apply to those funds, with two exceptions to this general principle: private equity fund marketed to private investors and institutional securitization vehicles.

-

BU - PP offerings not regulated at all, i.e. no restrictions on any part of the process (product, issuer, manager, disclosure, advertising and selling). -

CZ Placements of foreign funds offered to professional investors only, or to a maximum of 100 investors (p.a.) educated and experienced in capital market transactions: no license needed

- Domestic 'funds of qualified investors' "FQI"13: no license needed.

DE

Any placement that is not made publicly, i.e. drawing the attention of an undefined number of unknown persons to the fund; private placement : - an offer of investments in financial assets with a total consideration of no more than 20 units; - an offer of investments in financial assets with of total consideration of no more than € 100.000 calculated over a period of 12 months; - an offer of investments in financial assets whose price per unit and

Foreign real estate funds: do not need to be notified; no product requirements; no issuer or manager authorisation; advertising unrestricted; no disclosure requirements Foreign FoHF: Funds that are only offered via private placement need not to be notified; no product requirements; no issuer or manager authorisation; advertising unrestricted; no disclosure requirements HF: advertising unrestricted; no disclosure requirements

'Spezialfonds'14

11 It has to be kept in mind that there is no formal/legal definition of private placement in any Member State. Furthermore, open-ended investment funds are outside the scope

of the PD and can therefore not benefit from the prospectus exemptions. 12 Product: Non-UCITS; investors: max. 10 investors; no natural persons; requirements lifted: no requirement for authorisation of fund rules, and changes thereof, by

supervisor; no approval, only notification to supervisor and central bank; no restrictions on advertising; no prospectus; no publication of reports or prices. 13 max. 100 QI, min. investment threshold: EUR 35,000, ban on public offering and promotion; less stringent rules regarding risk diversification and eligible assets; more

flexibility in redemption and valuation periods 14 No approval or notification is required for the fund rules (units held by not more than 30 institutional investors (no natural persons) on the basis of written agreements with

the management company).

EN 49 EN

MS Private placement definition Other exemptions / obligations Special vehicles

per investor amounts to at least € 200.000; - investments in financial assets when offered solely to a restricted circle of persons. no PP of domestic UCITS funds

FI - No marketing permission is required for non-UCITS funds, if the units are marketed exclusively to the professional investors -

FR - - Obligation to inform investors about the nature of the PP -

HU Definition of 'private offering' in the Act on the Capital Market, Art.14-19, ~ PD definition.

- Issuer or the broker/dealer must ensure that information shall be provided to all investors to enable them to make an informed assessment; the issuer shall inform the HFSA concerning the private placement of securities within 15 days following the conclusion of the procedure; HFSA may request the issuer to supply extra information; Any contract for the purchase of securities shall be null and void if the securities were offered by ways other than public offering, and did not qualify as a PP. The issuer and the broker/dealer shall be under joint and several liability to compensate the investors for all costs and damages sustained in consequence. All written correspondence created in connection with the private offering of securities must clearly indicate that they are offered privately.

-

IE

Dividing line between public and private can vary from one case to another

No approval required for contractual funds; and for variable capital corporate funds if offered to less than 20 persons (usually institutional investors or HNWI)

Offerings of investment funds which require approval, and which are restricted to no more than 20 persons, are permitted and the Financial Regulator does not impose its normal marketing rules

-

LT Offerings not made over the media, in advertisements and addressed to less than 100 persons; PD definition

Publicly announce the price of investment units -

LU - - Specialized investment funds15

NL -

Funds and securities: offers addressed only to QI and less than 100 others: no regulatory supervision, prospectus requirement and conduct of business rules not applicable

Investment funds: exempt from need for authorization if offered to less than 100 persons, or if the value of participation rights on offer is EUR 50.000 or more, if the total consideration of the offering to the public is less than € 100,000.

Securities offers: no restrictions other than certain provisions on advertising.

-

PL Offering securities to less than 100 persons and not by means with unspecified address or public means - -

15 Reserved to well-informed and/or institutional investors;

EN 50 EN

MS Private placement definition Other exemptions / obligations Special vehicles

PT - No compulsory approval of documents, intermediation or registration; 'not subject to specific rules' -

SE Offers outside the scope of the PD rules - -

SK

Different definitions of public offering: CIS: any announcement, offer or recommendation through any channel to more than 50 persons;

Securities and investment services: any announcement to a wider range of persons by any means or form, which contains sufficient information

- -

SL PP of regulated investment funds is not allowed Issuer to notify the competent agency about the securities issue, the list of persons who

subscribed and paid the securities together with the relevant decision about the issue of securities 3 days before the offer

-

UK - - (no requirements would be lifted under a private placement compared to a public offering. So in fact there may be more protections for a private placement through an intermediary than for a public offer.)

-

Source: Based on Member States' replies to CESR questionnaire, Spring 2007.

EN 51 EN

Table AII.b: Ability to offer a Luxembourg domiciled Global Agriculture Specialist Investment Fund

Aus

tria

Bel

gium

Bul

garia

Cyp

rus

Cze

ch

Rep

ublic

Den

mar

k

Finl

and

Fran

ce

Ger

man

y

Gre

ece

Hun

gary

Irel

and

Italy

Latv

ia

Luxe

mbo

urg

Mal

ta

Net

herla

nds

Pola

nd

Portu

gal

Rom

ania

Slov

akia

Spai

n

Swed

en

UK

Exemption based on numerical limit on investors

50

100 100 100 100 20

50 Limit 100 100 100 50 100

Exemption for promotion to professional /qualified investor

Exemption for promotion to discretionary managers

Exemption for HNWI - these tests are country specific

limit

Prospectus directive style exemption available generally

Prior registration required but no guarantee that this will be given for non-harmonised funds

If over limit

No information for Estonia, Lithuania, Slovenia. Source: This matrix is based on information gathered by BlackRock and their advisers. No assurances are made as to its accuracy and it should not be relied upon by others.

EN 52 EN

Annex III: Qualified Investor vs Professional Client vs Eligible counterparty

Qualified Investor

(Prospectus Directive16, Article 2(1)(e))

Professional Client

(MiFID17, Annex II, Section I)

Includes entities carrying out characteristic activities authorised or

regulated by a non-Member State

Eligible Counterparty

(MiFID, Article 24(2))

May include third country entities equivalent to those mentioned

Credit institutions

Investment firms

Insurance companies

Pension funds and their management companies

Central banks

National governments

Other authorised or regulated financial institutions

Regulated collective investment schemes and their management companies

UCITS and their management companies

Commodity and commodity derivatives dealers

Locals Undertakings exempted from MiFID under Article 2(1)(l)18

Public bodies which deal with/manage debt

Regional governments

International and supranational institutions e.g. IMF, ECB, EIB

Supranational organisations

Large undertakings

Other regulated institutional investors

Legal entities not authorised or regulated to operate in the financial markets whose corporate purpose is solely to invest in securities

Other institutional investors whose main activity is to invest in financial instruments, including entities dedicated to the securitisation of assets or other financing transactions

16 Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003. 17 Directive 2004/39/EC of the European Parliament and of the Council of 21st April 2004. 18 Firms which provide investment services and/or perform investment activities consisting exclusively in

dealing on own account on markets in financial futures or options or other derivatives and on cash markets for the sole purpose of hedging positions on derivatives markets or which deal for the accounts of other members of those markets or make prices for them and which are guaranteed by clearing members of the same markets, where responsibility for ensuring the performance of contracts entered into by such firms is assumed by clearing members of the same markets.

EN 53 EN

Opted-up qualified investors

(Prospectus Directive, Articles 2(1)(e)(iv) and (v)

Opted-up professional clients19

(MiFID, Annex II, Section II)

Opted-up eligible counterparty

(Implementing Directive MiFID20, Article 50)

Small and medium-sized enterprises21

For professional investors only.

Natural persons23

Investors who meet certain specified criteria relating to the possession of adequate expertise, experience and knowledge to make their own investment decisions and to understand the risks involved in relation to the transactions or services envisaged.

Criteria24:

- the investor has carried out transactions of a significant size on securities markets at an average frequency of, at least, 10 per quarter over the previous four quarters;

- the size of the investor's securities portfolio exceeds EUR 0.5 million;

- the investor works or has worked at least one year in the financial sector in a professional position which requires knowledge of securities investment.

Clients other than the ones listed above (including public sector bodies and private individual investors) who meet specified criteria and have been assessed as possessing adequate expertise, experience and knowledge to make their own investment decisions and to understand the risks involved in relation to the transactions or services envisaged

Criteria22:

- the client has carried transactions, in a significant size, on the relevant market at an average frequency of 10 per quarter over the previous four quarters;

- the size of the client's financial instrument portfolio, defined as including cash deposits and financial instruments, exceeds EUR 500 000;

- the client works or has worked in the financial sector for at least one year in a professional position, which requires knowledge of the transactions or service envisaged.

19 Client can opt-up in a general manner or in respect of a particular investment service or transaction, or

type of transaction or product. 20 Commission Directive 2006/73/EC of 10th August 2006. 21 If provided for under national law (option left to Member States, subject to mutual recognition). 22 Two of these criteria should be satisfied to opt for the "professional investor" status. 23 If provided for under national law (option left to Member States, subject to mutual recognition). 24 Two of these criteria should be satisfied to opt for "qualified investor" status.

EN 54 EN

Annex IV: Scope of the Prospectus Directive and MiFID

Products

Prospectus Directive MiFID

"Securities"

(Prospectus Directive, Article 2(1)(a))

• transferable securities, except money market instruments having a maturity of less than 12 months

"Financial instruments"

(MiFID, Article 4(17) & Section C of Annex I)

• transferable securities25; • money-market instruments26; • units in collective investment undertakings; • financial derivatives (options, futures, swaps, forward rate

agreements and any other derivative contracts relating to securities, currencies, interest rates or yields, or other derivatives instruments, financial indices or financial measures) which may be settled physically or in cash;

• commodity derivatives that must be settled in cash or may be settled in cash at the option of one of the parties (otherwise than by reason of a default or other termination event);

• commodity derivatives that can be physically settled provided that they are traded on a regulated market and/or an MTF;

• commodity derivatives that can be physically settled, not otherwise mentioned in the previous bullet point, and not being for commercial purposes, which have the characteristics of other derivative financial instruments;

• derivative instruments for the transfer of credit risk; • financial contracts for differences; • derivatives relating to climactic variables, freight rates,

emission allowances or inflation rates or other official economic statistics that must be settled in cash or may be settled in cash at the option of one of the parties and any other derivative contracts relating to assets, rights, obligations, indices and measures not otherwise mentioned in Section C of Annex I to MiFID, which have the characteristics of other derivative financial instruments.

25 'Transferable securities' means those classes of securities which are negotiable on the capital market,

with the exception of instruments of payment, such as (a) shares in companies and other securities equivalent to shares in companies, partnerships or other entities, and depositary receipts in respect of shares; (ii) bonds or other forms of securitised debt, including depositary receipts in respect of such securities; any other securities giving the right to acquire or sell any such transferable securities or giving rise to a cash settlement determined by reference to transferable securities, currencies, interest rates or yields, commodities or other indices or measures

26 'Money market instruments' means those classes of instruments which are normally dealt in on the money market, such as treasury bills, certificates of deposit and commercial papers and excluding instruments of payment.

EN 55 EN

Services/activity regulated

Prospectus Directive MiFID

"Public offer" of securities subject to publication of PD compliant prospectus, approved by the competent authority of the issuer's or offeror's home Member State. Securities can be offered in other MS under the mutual recognition principle.

Public offer is broadly defined as "a communication to persons in any form and by any means presenting sufficient information on the terms of the offer and the securities to be offered, so as to enable an investor to decide to purchase or subscribe to these securities".

Also applies to the placing of securities through financial intermediaries.

No consistent implementation in EEA.

Provision of "investment services" to clients subject to conduct of business rules, including best execution and order handling rules (COB)

Investment services cover core investment services (referred to as investment services and investment activities) and non-core investment services (referred to as ancillary services).

Core investment services and activities include – amongst others - the underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis; placing of financial instruments without a firm commitment basis; investment advice.

Ancillary services include – amongst others – services related to underwriting.

Degree of application of COB rules depends on the client classification:

- retail investors: high level of protection

- professional investors: less stringent rules

- eligible counterparties (for dealing activities and ancillary services):

Safe harbour:

Exemption of obligation to publish a prospectus in specified circumstances:

(a) an offer of securities addressed solely to qualified investors (as defined in Article 2.1(e); and/or (b) an offer of securities addresses to fewer than 100 natural or legal persons per Member State, other than qualified investors (see separate comparative table); and/or (c) an offer of securities addressed to investors who acquire securities for a total consideration of at least EUR 50 000 per investor, for each separate offer; and/or (d) an offer of securities whose denomination per unit amounts to at least EUR 50 000; and/or (e) an offer of securities with a total consideration of less than EUR 100 000, which limit shall be calculated over a period of 12 months.

Level of protection:

Degree of application of COB rules depends on the client classification (see separate comparative table):

(a) retail investors: highest level of protection; (b) professional investors: not all COB rules apply in the same manner as for retail clients. (c) eligible counterparties (for dealing activities): COB rules can be waived.

EN 56 EN

Actors

Prospectus Directive MiFID

(Article 2(1)(h) and (i))

• Issuer: a legal entity which issues or proposes to issue securities;

• Person making an offer / Offeror: a legal entity or individual which offers securities to the public

(Article 4(17) & Section C of Annex I)

• Investment firms • Credit institutions • To a certain extent, UCITS management companies /

management companies of non-harmonized collective investment undertakings27

27 See UCITS-MiFID Vademecum, currently under preparation by Commission services.