On 3 March 2010, the European Commission set out the Europe 2020 Strategy, where the promotion of investment in SMEs was recognized as a key element to promote new areas of growth and move towards an innovation-led economy, as well as to offer new opportunities for market participants to raise and invest capital in social enterprises throughout Europe in a more simplified way.
The EuVECA and EuSEF labels were created to achieve this purpose and now form part of the Capital Market Union. Both regulations came into force in July 2013.
Until now, 70 EuVECA and 4 EuSEF had been notified to ESMA (European Securities and Markets Authority). Looking at these figures, one can appreciate that EuVECA regulation is satisfactory (but should be improved) and the EUSEF label was not as successful as foreseen.
The question was therefore why it was not more successful and what remedies that the European Union could take in order to achieve its goal. There are different reasons behind why both labels have not met their expectations. One of these was their publication in the same month of the AIFMD. Indeed, as everybody was focusing on this long-awaited directive, few people gave attention to the EUSEF and EuVECA; therefore their beginning was more difficult.
Furthermore, a few other reasons, mainly linked to the practicalities related to the approval per se and cross distribution of both labels, made them less attractive than anticipated.
For these reasons, the European Commission has published a consultation from September 2015 where EU member states were asked to answer questions in order to improve the interest for EuVECA and EuSEF.
This led to a legislative proposal to amend EuVECA and EuSEF regulations.
Proposed amendment: Managers
The European Commission proposes to broaden the scope of ‘manager’ to include large managers who can provide economies of scale and trusted brands, offering benefits for investors. In concrete terms, the proposal allows AIFMD-authorised managers to use the "EuVECA" and "EuSEF" labels.
Proposed amendment: qualifying portfolio (only for EuVECA)
Currently the assets in which the EuVECA is allowed to invest is restricted to small companies (i.e less than 250 employees and a turnover not exceeding EUR 50 million, or an annual balance sheet total not exceeding EUR 43 million). The idea is to broaden the spectrum of the qualifying portfolio and permit EuVECA to invest in larger companies (i.e. unlisted companies with less than 500 employees and SMEs listed on growth markets with a market capitalization not exceeding EUR 200 million).
Proposed amendment: supervisory authority
As mentioned above, certain practicalities were a burden to the pan- European distribution as certain supervisory authorities were imposing additional fees in relation to the cross- border marketing of EuVECA and EuSEF. In reaction to that, the proposed amendment will prohibit the supervisory authority from imposing fees and other charges in relation to cross-border marketing of EuVECA and EuSEF funds.
Furthermore, the proposal provides for measures to smoothen the registration process (notably the fact that an answer should be communicated to the potential EuVECA or EuSEF fund by the supervisory authority within two months, after the latter has lodged all the documents/information requested).
Proposed amendment: Investors (not retained by the European Commission in its proposal)
During the European Commission consultation, answers from the respondents invited a review of the minimum amount to be invested by a potential investor (i.e. an investor shall invest at least EUR 100,000). However the European Commission thought that: “the reduced minimum investment would introduce significant investor protection risks and might, in turn, hamper investor confidence in EuVECA and EuSEF funds”.
Entry into force and conclusion
It is now up to the European Parliament vote and Council endorsement to decide whether to move forward with the proposals.
Nobody knows if the proposals will help the growth of new EuVECA and EuSEF funds, but the EU Commission has provided the necessary assistance, after analysing the issues raised by the first regulations. The first impression from the market is that the proposal is welcomed by the different players.