Following its September 2015 consultation, the European Commission has published a legislative proposal that it has adopted for the Regulation amending the European Venture Capital Funds Regulation (Regulation 345/2013) (EuVECA Regulation) and the European Social Entrepreneurship Funds Regulation (Regulation 346/2013) (EuSEF Regulation).
The European Commission’s legislative proposal can be found here.
The proposed Regulation is designed to improve existing legislation that governs European Venture Capital Funds (EuVECA) and European Social Entrepreneurship Funds (EuSEF). The focus of these funds is to create new opportunities for market participants to raise and invest capital in innovative small and medium-sized enterprises (SMEs) and social undertakings throughout Europe. While EuVECAs are intended to support young and innovative companies by investing in privately held undertakings with an annual turnover of less than €50m and fewer than 250 employees, EuSEFs focus on enterprises whose aim is to achieve positive social impact. Since July 2013, EuVECAs and EuSEFs have been available to fund managers with a total value of assets under management of €500m or less. EuVECAs and EuSEFs can be marketed across the EEA to both professional and non-professional investors who commit a minimum of €100,000 to the fund. However, the development of these funds has been slow and the European Commission brought forward the review of the EuVECA Regulation and EuSEF Regulation in order to address these concerns.
During this review, the European Commission ran a public consultation from September 2015 which identified a number of factors holding back the development of EuSEFs and EuVECAs, including:
- the rules that govern the way such funds invest in assets
- the way the managers run such funds
- how the EuVECA Regulation and EuSEF Regulation interact with other existing investment fund laws, and
- the requirements with which EuSEFs and EuVECAs must comply in order to benefit from the available marketing passport.
In summary, the Regulation seeks to amend the EuVECA Regulation and EuSEF Regulation by extending the range of managers eligible to market and manage EuVECA and EuSEF funds; increasing the range of companies that can be invested in by EuVECA funds; and making the registration and cross border marketing of these funds easier and cheaper.
The Regulation contains amendments to the EuVECA Regulation and the EuSEF Regulation that include:
- allowing managers of collective investment undertakings authorised under Article 6 of the Alternative Investment Fund Managers Directive (2011/61/EU) (AIFMD)(AIFMs) that manage portfolios of qualifying venture capital and qualifying entrepreneurship funds to use the "EuVECA" and "EuSEF" designations respectively in relation to the marketing of those funds in the EU. As a result, access to the EuVECA and EuSEF fund designation will be extended to authorised AIFMs managing assets of over €500m. The AIFMs would have to register the EuVECA and EuSEF funds and comply with specific provisions under the respective Regulation, in particular:
- the 30% threshold for non-qualifying investments
- the rules on eligible investors
- specific disclosures to investors and notifications;
- expanding the range of qualifying investments permitted under the EuVECA Regulation to allow investment in small mid-caps and small and medium-sized enterprises listed on SME growth markets:
- EuVECAs will be permitted to invest in larger companies, including unlisted companies with fewer than 500 employees and SMEs listed on growth markets with a market capitalization of less than €200m. Follow-on investments made by EuVECAs are no longer subject to these investment restrictions;
- prohibiting competent authorities of host member states from imposing fees and other charges relating to cross-border marketing of EuVECA and EuSEF funds;
- streamlining the registration process by (a) providing that the competent authority of the home Member State must informs a manager as to whether it has been registered no later than two months after it has submitted all necessary information and (b) seeking to avoid duplicative registration processes under the EuVECA Regulation and the EuSEF Regulation and under AIFMD:
- the registration process will be improved by explicitly stating that duplicate registrations under AIFMD and EuVECA/EuSEF are not required, explicitly prohibiting national regulators from charging registration fees, requiring national regulators to determine applications within two months and by providing fund managers with a right of appeal against negative determinations;
- laying down registration conditions for EuVECA and EuSEF funds by AIFMs authorised under AIFMD. The proposal allows EuVECA and EuSEF funds to be registered by such AIFMs in a Member State other than that in which the AIFM is authorised; and
- ensuring that ESMA’s central database includes information concerning all managers of EuVECA and EuSEF funds and the funds that they market.
In addition, ESMA will be tasked with drafting regulatory technical standards to harmonise the minimum capital requirements for EuVECA and EuSEF funds managers.
Comments and Next Steps
The European Commission’s proposals will now be reviewed by the European Parliament and the Council of the EU (Council), which will consider what changes, if any, they wish to see to the proposed Regulation.
When the European Parliament and Council have each decided their preferred positions, they and the European Commission will join in trilogue negotiations in order to reach political agreement.
The approved Level 1 text would then be formally voted on in a plenary session of the European Parliament and subsequently endorsed by the Council before being translated into the official languages of the EU and, in due course, published in the Official Journal.