Private placement rules and law in Hungary

Hungary has implemented the AIFMD by Act XVI of 2014 on Forms of Alternative Investments and Their Managers and Amendment of Acts relating to the Financial Sector (the “Act”). The Act came into force gradually, but it has been fully effective since 1 December 2014.

Generally, any private placement of fund interests in Hungary must be reported to the National Bank of Hungary which also acts as a financial supervisory authority.

As opposed to a public offering, the private placement of fund interests in Hungary is not subject to the prospectus requirements. Pursuant to Act CXX of 2001 on Capital Markets, a placement qualifies as a “private placement” if it is performed not under a public offering as specified in the European Prospectus Regulation (EU) 2017/1129 (the “European Prospectus Regulation”). Also, on the basis of the European Prospectus Regulation, the requirement to prepare and publish a prospectus for the placement of fund units in Hungary does not apply if: 

1. fund units are offered only to qualified investors (i.e. investors recognised as professional clients or eligible counterparties in accordance with MiFID);
2. fund units are offered to fewer than 150 non- qualified investors in each EU Member State;
3. the minimum purchase is equal to EUR 100,000, or the equivalent in another currency;
4. the face value of the fund units  offered is at least EUR 100,000, or its equivalent in another currency; or
5. the issue value of all fund units  issued in the EU Member States does not exceed EUR 100,000, or its equivalent in any other currency, within 12 months from the offering date.   

Both closed-end and open-ended funds are subject to private placement provisions.

In respect of fund interests, Hungary has introduced a national private placement regime the main features of which are the following:

Marketing of a third country AIF managed by an EU AIFM is subject to the regime. 

Marketing for professional investors is allowed if:

1. the AIFM must comply with the Act;
2. appropriate cooperation arrangements for the purpose of systemic risk oversight in line with international standards are in place between the National Bank of Hungary and the supervisory authorities of the relevant third country, in order to ensure an efficient exchange of information that enables the National Bank of Hungary to carry out its duties;
3. the relevant third country is not listed as a NCCT by the FATF.  

In case of an EU AIF managed by a third country AIFM, marketing for professional investors is not regulated under Hungarian law therefore, it is not subject to the regime.

As a general rule, a public offering is subject to the prospectus requirements. However, in the following cases a public offering of fund units (e.g. offerings to at least 150 non-qualified investors in each EU Member State), a prospectus is not required:

1. in connection with the offering of money market instruments with an original maturity of less than twelve months;
2. in connection with the offering of units of an open-ended investment fund;
3. in connection with the registration of the following types of securities in a multilateral trading facility:
   • securities representing, over a period of twelve months, less than five million euros at Union level, or its equivalent in another currency, in total issue and value; or
   • securities issued as part of a series already admitted to trading on a regulated market or on a stock exchange established in an OECD Member State;
4. in connection with the public offering of securities where e.g. the issued securities serve as consideration in a merger, demerger or public takeover transaction or as dividends to existing shareholders, directors or employees.

Instead of a prospectus, a minimum  prospectus shall be prepared in accordance with the requirements set out in Act CXX of 2001 on Capital Markets for the public offering of securities whose offer value remains for a period of twelve months less than one million euro or equivalent at EU level.

Reverse solicitation may be excluded from marketing activity. Since reverse solicitation is made at the initiative of the investor, it will not qualify as a public offering or a private placement. Marketing activity covers making offers at the initiative only of the fund managers or on their behalf. Notwithstanding that, further interpretation is required and assessment of reverse solicitation would be analysed on a case-by-case basis, but the main criterion is that the purchase of fund interests should be initiated and controlled by the investor. Therefore, a professional service provider offering fund interests will not generally be able to benefit from the reverse solicitation exemption.

Under contract law, the placement may be deemed invalid and damages required to be paid. A court may be requested to order the invalidation by any affected investor or any other person who has a legitimate interest in nullifying the placement. However, market practice is very limited.

In addition, an administrative penalty may be incurred ranging from HUF 100,000 to HUF 2,000,000,000 (EUR 234 – EUR 4,657,697). Also, if the non-compliance is repeated or severe, the National Bank of Hungary may revoke the licence of the fund manager.

Generally, the private placement / public offering distinction applies to securities issued by any entity (such as an “ordinary company”). Accordingly, securities such as bonds, notes and warrants may provide a good private placement opportunity outside fund regulation, as long as these are indeed issued in a private placement (i.e. a placement to no more than 149 non-qualified investors).