Plan would create a “European Venture Capital Fund” designation and a single rulebook for marketing of VC funds across the EU
In June 2011 we reported on the European Commission’s consultation on the need for an EU-wide “passport” for venture capital funds. Yesterday the Commission published its proposed regulation that would create this passport and summarised it in its press release as follows:
“The new regulation will make it easier for venture capitalists to raise funds across Europe for the benefit of start-ups. The approach is simple: once a set of requirements is met, all qualifying fund managers can raise capital under the designation “European Venture Capital Fund” (EVCF) across the EU. No longer will they have to meet complicated requirements which are different in every Member State. By introducing a single rulebook, venture capital funds will have the potential to attract more capital commitments and become bigger.”
As the Commission observes in its frequently asked questions document on the proposed regulation, at the moment:
“there are no specific EU level rules that facilitate fund-raising by venture capital fund managers. Venture capital is much more developed in some countries than in others but only nine Member States have put in place dedicated rules for venture capital. The remaining 18 countries apply general rules on company or corporate law to venture capital funds. As a result, there is limited cross-border fundraising activity of European venture capital funds. On average, the proportion of cross-border fundraising for all types of venture capital funds has for the last four years reached only 12% (€ 2.5 billion)”.
The EVCF passport
The European Venture Capital Fund passport would be available for venture capital funds that:
- Invest 70% of their committed capital into unlisted SMEs;
- Provide equity or quasi-equity (such as a subordinated loan) to these SMEs; and
- Do not employ leverage.
The passport – which would be granted by the fund manager’s EU home member state – would then enable an EVCF to be marketed across the EU to “eligible investor”, which the proposed regulation (at Article 6) suggests should be professional investors as defined in the Markets in Financial Instruments Directive and high-net worth individuals and business angels. Needless to say, the proposed regulation prescribes various requirements that an EVCF would have to fulfil before being granted a passport, including requirements as to the investment portfolio, investment techniques and nature of investee companies.
Relationship with the AIFMD
At the moment, the European Union is in the process of finalising the detailed rules that will implement the Alternative Investment Funds Managers Directive (AIFMD). The AIFMD also provides a marketing passport for managers of venture capital funds – but, crucially, the AIFMD passport is only available for managers whose aggregate assets under management exceed € 500 million. That would exclude many venture capital houses for, as the Commission’s FAQs report:
“According to the latest figures available from the European Private Equity and Venture Capital Association, 98% of European venture capital fund managers manage a portfolio of funds that would be beneath the €500 million threshold set out in the AIFMD.”
So the proposed EVCF passport would be available to a venture capital manager with aggregate assets under management of less than € 500. Once that figure is exceeded, the manager would need to apply for a regular AIFMD passport.
The Commission’s proposal for an EVCF passport now pass to the European Parliament and the Council; implementation is several years away. There is more at the Commission’s venture capital webpage.
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