The proposed european venture capital funds regulation

The European Commission recently published its proposal for a new EU venture capital framework[1] as part of its action plan to improve access to finance for small and medium-sized enterprises (SMEs).  If adopted, the new regime would make it easier for managers of EU venture capital funds to market their funds and raise capital across the EU.

The proposed venture capital regime intends to address what are perceived to be the main weaknesses of the European venture capital industry, particularly when compared to the thriving US venture capital market:

– Difficulties in raising capital from institutional investors;
– the quality of available investment opportunities; and
– the fragmentation of the market along national lines.

Who would the proposed new regime apply to?

The regime is proposed to apply to managers of collective investment undertakings who:

– are established in the EU;
– are subject to registration in their home Member State; and
– manage portfolios of ‘qualifying venture capital funds’ with assets under management not exceeding €500 million.

A ‘qualifying venture capital fund’ is a fund that invests at least 70% of its capital contributions and uncalled committed capital in equity or quasi equity instruments issued by a ‘qualifying portfolio undertaking’, that is, an undertaking which meets the following criteria:

– It is not listed on a regulated market (note that AIM is not a regulated market; a company listed on AIM could therefore fall within the definition of ‘qualifying portfolio undertaking’ provided it meets the other criteria listed below);
– is not itself a fund;
– employs fewer than 250 persons; and
– has an annual turnover of no more than €50 million or an annual balance sheet total of no more than €43 million.

When may a fund be designated as a ‘European venture capital fund’

Managers of qualifying venture capital funds may use the designation ‘European venture capital fund’ when marketing such funds in the EU if they comply with certain conditions including, among others, the following:

– Portfolio composition – No more than 30% of the fund’s capital contributions and uncalled committed capital shall be used to acquire investments in non-qualifying portfolio undertakings;
– Leverage – The permitted debt exposure at the level of the qualifying venture capital fund is limited;
– Eligible investors– Units or shares of the qualifying venture capital fund may only be marketed to:
* professional clients, and
* other investors such as high-net worth individuals provided they meet certain criteria such as, for instance, a commitment to invest at least €100,000.

 The new marketing passport

Fund managers who intend to use the designation ‘European venture capital fund’ to market their qualifying venture capital funds can apply for registration in their home Member State. Once registered, the fund manager may market qualifying venture capital funds under that designation across the EU.

Relationship to the AIFM Directive

The Alternative Investment Fund Managers Directive (AIFM Directive) (see our January 2011 update) and the proposed European venture capital regime, if adopted, will co-exist as autonomous legal acts and complement each other. Alternative investment fund managers with assets under management not exceeding €500 million are not subject to the AIFM Directive. Investment managers of such smaller funds interested in taking advantage of an EU marketing passport will have the option to either opt-in to the more restrictive regime of the AIFM Directive or register under the ‘lighter’ regime of the proposed European venture capital funds regulation.

What next?

The proposed regulation has been passed to the European Parliament and the EU Council for negotiation and is scheduled to be adopted by June 2012. As this legislative proposal was made in the form of a regulation rather than a directive, it will be immediately binding for Member States once adopted by the European Parliament and the EU Council on a par with national law, without requiring Member States themselves to take action to implement the regulation. The proposed regulation provides that it shall apply from 22 July 2013.

Comment

The EC proposal to create an internal market for venture capital is a welcome step in closing the finance gap left by the 2008 and 2009 financial crisis and improving SMEs’ access to finance. However, further steps will need to be taken, in particular in relation to removing existing tax obstacles to cross-border venture capital investment, to breathe life into the underdeveloped European venture capital industry and make it more attractive for both SMEs and venture capitalists.