Germany: Revised EuVECA Regulation Approved

The European Parliament and now also the Council have approved a revision of the EuVECA Regulation. The revised EuVECA Regulation contains some important changes for managers of EuVECA funds.

This client information outlines the most important changes and the implications for existing and future EuVECA managers.

Key Facts

  • Own funds of the manager: the regulation now includes a fixed formula for their necessary own funds of the manager which will be substantially lower than what is required under the AIFMD and under BaFin's recent administrative practice. The own funds have to be held in the form of cash or cash equivalents.
    The new own funds requirements do not apply with regard to existing EuVECA funds. To the extent BaFin has requested in the past own funds in excess of the new own funds requirements, we believe that a EuVECA manager should nevertheless be eligible for the application of the new rules.
  • Permissible investments: in addition to non-listed SME now also non-listed enterprises that have up to 499 employees as well as SME that are listed on a SME growth market and which have an average market capitalization of less than €200 million are permissible investments. The revised EuVECA Regulation may thus in the future be also of interest to sub-threshold managers in the small midcap sector as a regulatory framework.
  • Follow-on investments: it has been clarified that follow-on investments are permissible even if the target enterprise no longer fulfills the criteria.
  • Marketing costs: the regulators of the countries into which a fund is marketed may no longer request a fee for such marketing.
  • EuVECA label: as from now on all fully-regulated managers with assets under management of more than €500 million may market funds under the EuVECA label to professional and semiprofessional investors in the EU.
  • Registration process: a new maximum period of two months for new registrations and of one month for amendments to the registrations has been introduced.

We have summarized the most important changes below in more detail.

1. Own funds requirements

Hitherto the EuVECA Regulation only contained a very general requirement for a EuVECA manager to have sufficient own funds. Such requirement has been implemented quite inconsistently by BaFin and other regulators. In recent times BaFin requested the larger own funds. The revised EuVECA Regulation now contains a detailed provision determining the amount of the necessary own funds and in which form such have to be held.

In any event a EuVECA manager has to hold an amount equal to 1/8 of its fixed annual overhead of the preceding year but at least €50,000. For a new manager the (reasonable) business plan is decisive.

If the assets under management in the EuVECA funds exceed €250 million, additional own funds have to be held equal to 0.02% of the amount by which the assets under management in the EuVECA funds exceed €250 million. Up to 50% of such additional own funds may be provided by a guarantee of a credit institution or an insurance company.

Otherwise, the required own funds have to be held in cash or cash equivalents.

2. Permissible investments, follow-on investments

The definition of the permissible target enterprises (so-called qualifying portfolio undertakings) has been expanded considerably. Up to now such definition used the figures known from the state-aid regulations (non-listed, less than 250 employees as well as an annual turnover not exceeding €50 million or an annual balance sheet total not exceeding €43 million). From now on every non-listed enterprise that has less than 499 employees is a permissible target enterprise. In addition such SMEs that are listed on an SME growth market are permissible target enterprises if their average market capitalization is less than €200 million.

It has also been clarified that the above restrictions only apply at the time of the initial investment or for the EuVECA fund, i.e. follow-on investments are permissible irrespective of such restrictions.

Also in the future, a EuVECA fund may invest up to 30% of its investable capital in non-qualifying investments.

3. Marketing fees

In the past, some member states have requested a fee for the pure marketing of a EuVECA fund in their territory. Such practice will no longer be permissible. Accordingly, managers may now use a longer list of potential target countries rather than to keep such list short for cost reasons.

4. EuVECA regime for fully-licensed AIFM

Alternative investment fund managers with assets under management of more than €500 million are subject to the full regulation under the AIFMD. The EuVECA regime used to be open for such managers only if they had been registered as EuVECA manager before their assets under management exceeded the threshold.

From now on all fully-licensed managers may use the EuVECA regime if they register a specific fund for such purposes. Having obtained the EuVECA marketing passport they may – exceeding the AIFMD marketing passport – market in the EU to EuVECA semiprofessional investors.

5. Registration process

A new maximum period of two months for the registration of a new EuVECA manager has been inserted in the regulation. The period starts once the required documents have been submitted. In the future, the registration process will be harmonized by European technical standards which will be developed by ESMA and adopted by the commission.

The regulation now expressly provides that a EuVECA manager has to inform the regulator in advance of all material changes to the conditions of its initial registration. Within one month the regulator may reject or restrict the changes. Such one-month period may be extended by up to one additional month. The changes may be implemented if the regulator does not object within the period.

All information that is the basis of the registration must now be submitted to ESMA by the national regulators. ESMA will draft technical standards for the registration requirements as well as for the information that EuVECA managers have to submit to the national regulators for the registration. In addition, ESMA will develop standard forms, templates and procedures for the registration process. Such standards developed by ESMA will then be adopted by the Commission in a legally binding way.

ESMA will conduct peer reviews of the national regulators to further harmonize the registration process.

6. Liability for infringement of the regulation

Small as well as large EuVECA managers will be liable for any losses or damages resulting from the infringement of the regulation.

7. Application, grandfathering

As the revised EuVECA regulation has now also been adopted by the Council, it will be published in the European Union Official Journal in the near future. It will apply to all EuVECA managers three months and 20 days after such publication.

The new own funds requirements do not apply to existing EuVECA fund managers and their existing EuVECA funds. However, they do apply when a new EuVECA fund is set up by an existing manager. Until such time, those managers are required to be able to justify they have sufficient own funds to ensure operational continuity.

To the extent BaFin has requested in the past own funds in excess of the new own funds requirements pursuant to the revised EuVECA regulation, we believe that a EuVECA manager should nevertheless be eligible for the application of the new rules.

8. Pie in the sky

As customary in European Union, legislation the revised EuVECA regulation contains some "instructions" for the commission.

  • In the negotiations over the last months, the industry has not been able to achieve that a management passport (i.e. the possibility for a EuVECA manager from one member state to manage EuVECA funds established in another member state) is included in the regulation. Only an instruction for the Commission has been inserted to explore whether such passport should be included in the next revision in four years' time.
  • In addition the Commission is requested to explore whether there is a need for a harmonization of the marketing definition.

The further development in notice to areas remains to be seen.

For further information please contact us.

P+P Pöllath + Partners is an internationally operating law firm, whose 34 partners and more than 125 lawyers and tax advisors in Berlin, Frankfurt and Munich provide high-end legal and tax advice.

The firm focuses on transactional advice and asset management. P+P partners regularly advise on corporate/M&A, private equity and real estate transactions of all sizes. P+P has achieved a leading market position in the structuring of private equity and real estate funds and tax advice and enjoys an excellent reputation in corporate matters as well as in asset and succession planning for family businesses and high net worth individuals.

P+P partners serve as members of supervisory and advisory boards of known companies. They are regularly listed in domestic and international rankings as the leading experts in their respective areas of expertise. For more information (including on pro bono work and P+P foundations) please visit our website

www.pplaw.com.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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