On 7 December 2011, the EU Commission published a proposal for a regulation on venture capital funds (the "Regulation"). The Regulation is intended to address regulatory fragmentation and the absence of an efficient venture capital sector within the EU. Its general objective is to make European SMEs more competitive in a global market place. Venture capital funds are within the scope of the Alternative Investment Fund Managers Directive ("AIFMD") which will come into force in July 2013. However, according to the latest figures available from the European Private Equity and Venture Capital Association (EVCA), 98 per cent of European venture capital fund managers manage a portfolio of funds that would be valued at less than the €500 million threshold set in the AIFMD.
The Regulation applies to managers of non-UCITS collective investment undertakings that operate under the designation "European Venture Capital Fund" (EVCF) provided they have registered under the AIFMD(1) and they manage portfolios of qualifying venture capital funds whose assets under management do not exceed €500 million. It introduces uniform requirements for EVCF managers as to the investment portfolio, investment techniques and eligible undertakings that a qualifying venture capital fund may target. Managers of EVCFs will be subject to uniform registration requirements and will be able to avail of an EU-wide passport.
A "European Venture Capital Fund" is defined by three essential requirements:
- it invests 70 per cent of the capital committed by its sponsors in SMEs;
- it provides equity or quasi-equity finance to these SMEs (ie 'fresh capital'); and
- it does not use leverage.
EVCFs may only be marketed to professional investors as defined in the Markets in Financial Instruments Directive. Marketing to other investors is only allowed subject to a minimum €100,000 subscription and provided certain procedures are followed by the fund manager to ensure the investor understands the risks involved.
The publication of the proposed regulation follows a public consultation launched on 15 June 2011 by the Commission on the core elements of a possible European framework for venture capital funds, which closed on 10 August 2011. The Regulation now passes to the European Parliament and the Council for negotiation and adoption under the co-decision procedure. It is intended that the proposals will come into force at the end of 2012.
Comment
A harmonised regime for venture capital funds in Europe would be a welcome development as fund managers will not have to contend with disparate national rules in order to access investors on a cross-border basis. The introduction of a regime specifically for venture capital funds also means that such funds will not have to exercise the option to opt into the AIFMD to avail of an EU-wide passport, which would impose a greater regulatory burden and in appropriate rules on venture capital funds.
The explanatory memorandum and Regulation can be accessed here.
Footnote
1 Registration with competent authorities by alternative investment fund mangers (AIFM) who fall under the prescribed thresholds is a requirement of the AIFMD but does not require full compliance with the provisions of AIFMD.
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