Marketing Private Equity Funds In Finland

Article by Jyrki Tähtinen and Paulus Hidén

Primarily there are two Finnish acts that are of relevance when marketing private equity funds to Finnish investors. The Finnish Securities Markets Act (SMA) regulates, among other things, offerings of securities. The SMA contains three different provisions on offerings, one on the obligation to draft a prospectus and two of a more general nature. The scopes of application of these provisions are not identical. Furthermore, the general scope of application of the SMA could mean that the SMA is not necessarily applicable to a specific offering of securities.

The Mutual Funds Act (MFA) regulates issues relating to common funds as well as the marketing of collective investment undertakings (UCITS). The question here is whether or not a foreign private equity fund could be considered as a UCITS and be subject to the marketing provisions of the MFA.

In addition, the Act on Consumer Protection is applicable to the marketing of any securities. As private equity funds are rarely marketed to "consumers" as defined in the Act, its provisions are not analysed in this article.

When a Finnish lawyer refers to legislation on UCITS while dealing with a private equity fund, foreign lawyers often question whether there is some misunderstanding as to the nature of the fund in question. The MFA is in fact the Finnish implementation of the UCITS directive. However, the Act is not fully clear in its definition of a collective investment undertaking and it could be interpreted so that the marketing provisions of the Act would apply to foreign closed-end funds as well. According to these provisions marketing of securities of a foreign fund would be subject to a permit thereto and submission of certain materials to the Finnish Financial Supervision Authority (FSA).

The preparatory legislative materials of the MFA as well as a statement issued by the FSA offer more comfort and render it evident that the MFA is not applicable to the marketing of closed-end funds. The governmental bill (a preparatory document that usually is considered to be significant in the interpretation of any act) regarding the act and statement K/34/2000 by the FSA note that UCITS are open to all investors and always raise funds from the public and that fund rules cannot restrict the range of unit-holders. In practice Finnish authorities have also considered a fund the rules of which restrict (with certain exceptions) subscriptions and redemptions within a period of five years from initial subscription to be "closed-ended".

The conclusion would clearly be that marketing customary closed-end private equity funds would not generally be subject to the provisions of the MFA. It could also be noted that in any case the MFA states that it is not applied to marketing securities of a foreign mutual fund to professional investors as defined in the Act (in which case no permit is required and no materials has to be submitted to the FSA), if the rules or provisions of the common fund provide that that the securities may only be held by professional investors.

Due to transfer restrictions applicable to limited partnership interests the SMA does not usually give rise to any concern with regard to an average private equity fund. Although the SMA was amended recently so that the Act currently is quite clearly applicable to limited partnership interests in general, the Act is not applicable unless the relevant securities are freely transferable and "issued to general circulation". This has been interpreted to mean that the securities are commonly transferable i.e. that entities other than members of a pre-defined, limited group have access to the securities in question (public quotation, however, is not required and, on the other hand, the intent of an issuer is not sufficient unless an actual restriction on transfers is applicable). The interests in most private equity funds are obviously not freely transferable in this sense.

Even if the SMA would be applied to a certain offering, depending on the target group there usually would not be an obligation to draft a prospectus. The provision of the SMA on the obligation to draft a prospectus states that anyone offering securities to the "public" shall draft a prospectus. In its statement K/41/2002 the FSA states inter alia the following:

"The FSA considers that any offering of securities to more than one hundred investors should generally be regarded a public offering. As the number of potential investors is determined, an individual interest group can be considered to constitute a single investor. Consequently, e.g. entities that belong to the same group or are controlled by the same person may be considered as a single investor as long as the investment decisions of such entities are made by a single body. Similarly, a group of investors can be regarded as a single investor when its decisions on investments are made by a custodian on the basis of a full power of attorney."

Since there are only a limited number of appropriate Finnish investors, a private equity fund is not usually offered to more than 100 persons. An offeror of securities could however be required to submit to the FSA a list of the investors to whom the securities are offered in Finland.

A second provision of the SMA obliges an issuer of securities to disclose sufficient information on matters having a significant effect on the value of the securities. The application of this provision is limited to issues of securities to "general circulation". The FSA’s interpretation is that the required information would be the same as required in a prospectus unless "the subscribers, in view of their professionalism and experience, demonstrate sufficiently clear understanding of the issuer's financial position and the nature of the securities offered."

Finally, the SMA provides that securities shall not be marketed by untrue statements or misleading information or by using otherwise inappropriate methods. This provision has no restrictions with respect to the target group and would therefore apply to any offering subject to the SMA.

In general, Finnish securities legislation does not set any major obstacles for marketing closed-end private equity funds to a limited number of Finnish investors if the terms of the fund, as usual, prohibit transfers of the fund interests. However, at least if the group of offerees also encompasses individuals or a larger group of investors, where the fund is not clearly closed-end or if the transfer provisions of the fund agreements are flexible, it is advisable for the offeror of the fund interests to seek legal advise in view of the marketing of the fund interests.