If you look around the market for public AIFs (alternative investment funds), you will quickly notice that not all advertising meets the strict regulatory requirements. The spectrum of violations ranges from exuberant promises of returns to trivializing risk presentations. But what exactly is considered advertising in the fund sector and what rules must be observed?
This article sheds light on the most important aspects of fund marketing for retail AIFs and provides an overview of the legal framework, the right time for advertising measures and the content requirements for advertising. It becomes clear that despite the strict requirements, there is still room for creative and effective marketing strategies – as long as they are in line with the applicable regulations and protect the interests of investors.
1. What is advertising in the context of audience AIF?
Before dealing with the content requirements of advertising, it must first be clarified what is to be understood as advertising in the first place. The conditions under which advertising exists are not defined by law. However, the term “advertising” is broadly defined in the context of retail AIFs. The term “marketing advertisement” mentioned in the guidelines of ESMA (the European Securities and Markets Authority) can be seen in the same way as that of “advertising” in the KAGB and is narrowed down there with examples. This includes all communications promoting an AIF, regardless of form and format. These include:
- classic advertisements in print and online,
- Pitch decks, brochures and presentations,
- Press articles and releases,
- Interviews, videos and podcasts,
- Social media posts and
- the fund provider’s website.
Crucially, these statements are aimed at arousing or increasing interest in acquiring a fund. However, there are exceptions. Mandatory legal information such as:
- sales brochures,
- ESG Annexes,
- PRIIP (Packaged Retail and Insurance-based Investment Products) key information documents (BIB),
- articles of association,
- Investment conditions and
- Annual reports.
General company announcements, such as changes in management that do not relate to a specific product, also do not fall under the term advertising. ESMA’s guidelines also make it clear that not only marketing advertisements from management companies are covered by the scope. Rather, it also refers to advertisements that originate from third parties and are used by the capital management company (KVG) for marketing purposes. The KVG must therefore ensure that this advertising also meets the requirements.
2. The legal framework
The requirements for the content of advertising for retail AIFs result from numerous legal bases:
- Article 4(4), (1) and (5) of Regulation (EU) 2019/1156,
- Articles 36 and 44 of Delegated Regulation (EU) 2017/565,
- Section 302 (1), (2) and (3) of the German Capital Investment Code (KAGB),
- Section 14 of the Financial Investment Brokerage Ordinance (FinVermV),
- ESMA Guidelines on Marketing Ads and
- BaFin leaflet for advertisements on the intended distribution of EU AIFs to private investors.
These regulations form the legal framework for all marketing activities in the field of public AIFs.
3. Timing is everything: When can I advertise?
A crucial aspect of fund marketing is when the advertisement is published. Prior to the approval of distribution in accordance with Section 316 KAGB, advertising measures are severely restricted. At this stage:
- no publication of specific product names,
- no publication of details of the investment strategy and
- no prospect of economic indicators or financial forecasts.
Only a general indication that a new AIF is being planned is permitted, such as:
“We are dealing with the launch of a closed-end retail AIF in the commercial real estate sector and value-add measures.”
Comprehensive advertising measures are only permissible with the approval of the distributor after the distribution notification. Then you can:
- specific product name can be used,
- details of the investment strategy, ESG strategy and financial forecasts are provided, and
- information on the minimum shareholding.
It is important to note that sales may only be carried out by KVG and commissioned sales companies.
4. Content requirements for advertising
The content requirements for the advertising of funds are strictly regulated and are based on several legal bases. Central to this is Section 302 (1) KAGB, which was revised in 2021 and refers to the directly applicable Art. 4 (1) Regulation (EU) 2019/1156. These rules require Alternative Investment Fund Managers (AIFMs), managers of EuVECA (European Venture Capital Funds) and EuSEF (European Social Entrepreneurship Funds) and management companies of UCITS (Undertakings for Collective Investment in Transferable Securities) to clearly label marketing advertisements as such and to present the risks and opportunities associated with the acquisition of fund units in a balanced manner. In addition, all information in promotional materials must be fair, unambiguous and not misleading.
To specify these requirements, ESMA developed guidelines on marketing ads for the distribution of investment funds1 in 2021, which are divided into three main areas: the identification of marketing ads; the similarly clear description of risks and opportunities as well as the fair, unambiguous and non-misleading nature of marketing advertisements. These collected guidelines form the framework for all marketing activities in the area of retail AIFs and ensure that investors are fully and transparently informed and thus protected from misleading advertising.
4.1 Identification and Disclaimer
Advertising for retail AIFs must be recognisable as such and thus make it clear that it pursues a purely marketing purpose and is therefore not sufficient to make an investment decision. The label “marketing ad” or “advertisement” must be placed in a prominent place. In addition, ESMA’s guidelines require a disclaimer, such as:
“This is a marketing ad. Please read the prospectus and [Fondsname] the PRIIP-BIB before making a final investment decision.” 2
If the format or length of an online marketing ad does not allow for a detailed disclaimer, this can be replaced by a shorter identification of the marketing purpose. This can be done, for example, by using “marketing ad” on banners or short videos on web pages, or by stating “#Marketing ad” on social media platforms. For video presentations, the notice should be embedded in the video, with an ad only at the end of the video considered insufficient.
4.2 Balanced presentation of opportunities and risks
A fair and balanced presentation of opportunities and risks is always necessary when advertising retail AIFs. The information on risks must be just as clearly recognizable in terms of presentation and format as the description of the opportunities. This means that risk information must not be presented in footnotes or with smaller font size. The font and size used to describe the risks should at least correspond to the prevailing font size in all the information provided. A recommended form of presentation is a two-column table or a list in which risks and opportunities are clearly compared on a single page. It is not permissible to refer only to the opportunities and to refer to another document for the description of the risks. Both risks and opportunities must be mentioned either in the same place or immediately after each other. It is particularly important that reference to the illiquid nature of the investment and the risk of total loss must not be missing.
4.3 Addressee-oriented formulations & cost transparency
When advertising public AIFs, it is of central importance to formulate them in a way that is appropriate for the target group, as these funds are aimed at private investors. The language used must be understandable. Overly technical terms should be avoided. The transparent and complete presentation of cost information is particularly important. Investors need to be able to understand the overall impact of costs on the amount of their investment and the expected returns. If parts of the total costs are to be paid in a currency other than that of the investor, the currency in question must be clearly indicated. In addition, an alert is required to indicate possible fluctuations in costs due to currency and exchange rate fluctuations.
4.4 Compliance with legal documentation
All advertising statements must comply with the official legal documents (sales prospectus, pre-contractual information according to the Disclosure Regulation, investment conditions, PRIIP-BIB, annual report). In particular, the material risks from the prospectus must be mentioned, including the illiquid nature of the investment and the risk of total loss.
In addition, the advertising must:
- refer to the prospectus and PRIIP-BIB,
- indicate where and how investors can obtain these documents, and
- Hyperlinks to the documents included.
Sustainability Aspects & Investor Rights
When promoting sustainability aspects of a retail AIF, the information must be consistent with the information contained in the fund’s legal and regulatory documents, in particular the pre-contractual information under the Disclosure Regulation. It is advisable to include a link to the website with the sustainability information in accordance with the Disclosure Regulation in the advertisement, if this is relevant to the type of advertisement. In this context, the scope of sustainability-related information must not exceed the extent to which sustainability aspects are actually part of the investment strategy of the product. The advertisement should also indicate that an investment decision should take into account all the characteristics and objectives of the fund as described in the prospectus or other information documents. In addition, the advertisement must contain a reference to the summary of investor rights and draw attention to the possibility of a sales revocation by the KVG.
4.6 Performance Information
In the case of information on past performance, it must be clearly indicated that this does not indicate future returns. Forecasts of future performance are only permissible if they are based on objective data and are accompanied by a standardised warning indicating the uncertainty of such estimates and the dependence on market developments:
“The scenarios presented are an estimate of future performance based on past knowledge of the performance of this investment and/or current market conditions and are not an accurate indicator. How much you actually receive depends on how the market develops and how long you hold the investment/product.” 3
Absolute statements such as “the best fund” or promises of a “safe investment” are not permitted. Advertising with the BaFin approval is also not permitted, although a neutral mention is possible. Particular attention must be paid to a balanced presentation of opportunities and risks.
5. Sanctions
BaFin can prohibit advertising or issue other necessary orders to sanction abuses in advertising. A violation of Regulation (EU) 2019/1156 can result in a fine of up to EUR 200,000. In order to trigger the fine, it is sufficient if an intentional or negligent violation of:
- there is a provision of Art. 4 para. 1 Hs. 1, para. 2 sentences 1 or 2, in each case also in conjunction with Para. 5, or Art. 4 para. 4 on a security obligation for marketing advertisements specified therein, or
- contrary to Art. 4 para. 1 Hs. 2, it is not ensured that information is unambiguous and not misleading, or
- the person responsible within the meaning of Article 4 does not ensure that the information referred to in Article 4(3) is included for the use of a marketing advertisement.
6. Conclusion: Despite everything, there is room for creativity in audience AIF advertising
The legal requirements for advertising retail AIFs are complex, which requires providers to exercise a high degree of diligence to avoid regulatory violations. Despite these limitations, there is room for creative and effective marketing strategies, as long as they remain within the given legal framework. A thorough legal review of all promotional materials before publication is necessary to comply with the requirements and avert severe fines and potential reputational damage.
1 See: ESMA34-45–1272 EN.
2 ESMA34-45–1272 DE, para. 7.
3 ESMA34-45–1272 DE, para. 55.
